PROSPECTUS
Filed pursuant to Rule 424(b)(4)
Registration Number 333-85139
4,100,000 Shares
[MOTHERNATURE.COM LOGO APPEARS HERE]
MotherNature.com, Inc.
Common Stock
----------------
This is an initial public offering of 4,100,000 shares of common stock of
MotherNature.com, Inc. MotherNature.com is selling all of the shares of common
stock offered under this prospectus.
There is currently no public market for the shares. Our common stock has been
approved for listing on the Nasdaq National Market under the symbol "MTHR."
Investing in our common stock involves a high degree of risk. See "Risk
Factors" beginning on page 5 to read about risks you should consider carefully
before buying shares of our common stock.
Neither the Securities and Exchange Commission nor any other regulatory body
has approved or disapproved of these securities or passed upon the accuracy or
adequacy of this prospectus. Any representation to the contrary is a criminal
offense.
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Per
Share Total
------ -----------
Public offering price....................................... $13.00 $53,300,000
Underwriting discounts and commissions...................... $ 0.91 $ 3,731,000
Proceeds, before expenses, to us............................ $12.09 $49,569,000
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We have granted the underwriters a 30-day option to purchase up to an
additional 615,000 shares of common stock from us at the initial public
offering price less the underwriting discount. The underwriters expect to
deliver the shares on December 15, 1999.
----------------
Bear, Stearns & Co. Inc.
Hambrecht & Quist
Wit Capital Corporation
The date of this prospectus is December 10, 1999
Inside Front Cover:
[Photograph of a family in front of a computer with the MotherNature.com home
page on the screen.]
[Photograph of several MotherNature.com products, including shampoo, St. John's
Wort, Creatine, Energy/Sports Formula and dog food.]
The following text appears on the inside front cover: "an online retailer of
vitamins, supplements, minerals and other natural and healthy living products."
Inside front cover gatefold:
Left page:
[Photograph of woman swimming.]
[Photograph of MotherNature.com Web site home page.]
[Photograph of MotherNature.com Web site page relating to Maca.]
[Photograph of healthy couple.]
The following text appears on the left page of the gatefold: "a focus on
customer solutions--MotherNature.com combines informative content on nutrition
and health with a vast selection of vitamins, supplements, minerals and other
natural and healthy living products. Our user-friendly site enables customers
to shop four ways: by department, by gender/age, by ailment and by brand."
"The source of all things natural--we currently offer over 13,000 products--and
have the capacity to offer many more. In the herb category, for example,
popular items include echinacea, ginkgo biloba, ginseng, and St. John's Wort.
Our full range of vitamin products includes folic acid, vitamins A through E,
and bioflavonoids. We offer a complete assortment of mineral products, such as
calcium, chromium, potassium, and zinc. And we carry many popular brands,
including Natrol, Twinlab and Naturemade."
Right page:
[Photograph of woman stretching.]
[Photograph of MotherNature.com Web site page of health-related articles.]
[Photograph of collection of Rodale books.]
[Photograph of woman unpacking box of MotherNature.com products.]
[Photograph of several MotherNature.com products, including teas, coffee,
Gluco-Support Formula and Executive Stress Formula.]
The following text appears on the right page of the gatefold: "an active
community of health-conscious consumers--MotherNature.com is a content provider
for consumers interested in healthy living solutions. We've established an
active online community dedicated to educating consumers about healthy living
and natural products and communicate with this community through e-mail alerts,
late breaking news postings and a bi-weekly newsletter. Thanks to our recent
alliance with Rodale Inc., we also have the right to offer the contents of over
150 healthy living books and certain columns from Prevention magazine."
"a memorable consumer brand--MotherNature.com offers 375 private label products
in a variety of categories, including coffee, lip balm, vitamins, minerals,
herbs, supplements, soaps, pillows and comforters."
PROSPECTUS SUMMARY
This summary highlights certain information found in greater detail elsewhere
in this prospectus. In addition to this summary, we urge you to read the entire
prospectus carefully, especially the risks of investing in our common stock
discussed under "Risk Factors," before you decide to buy our common stock.
MotherNature.com, Inc.
Our Business
We are an online retail store and information source for natural and healthy
living products. We offer approximately 13,000 vitamins, supplements, minerals
and other natural and healthy living products on our site. We also provide
educational and authoritative information on these products from recognized
sources in an easily accessible manner that allows our customers to make
informed product selections. Through our innovative combination of content and
commerce and an aggressive mass media advertising program, we intend to
establish MotherNature.com as the destination of choice and trusted advisor for
consumers interested in vitamins, supplements, minerals and other natural and
healthy living products.
Since we launched our redesigned Web site in late 1998, our revenues have
grown from $105,000 in the fourth quarter of 1998, to $251,000 in the first
quarter of 1999, to $704,000 in the second quarter of 1999 to $1.6 million in
the third quarter of 1999. In addition, revenues in October 1999 were
approximately $818,000. As of September 30, 1999, we had approximately 136,000
registered members, or persons who have provided us with contact information,
in the MotherNature.com community.
The key components of our site include the following:
Educational and Authoritative Information. Through our Healthy Living
Library, we provide consumers with access to over 3,000 articles, news clips,
excerpts from Rodale books and encyclopedia entries from the Encyclopedia of
Natural Health, as well as narratives from prominent sources and journals, on a
variety of natural and healthy living topics, such as health concerns, natural
remedies and recent studies. The Encyclopedia of Natural Health is licensed
from Healthnotes, Inc. and incorporates information gathered from over 500
authoritative scientific and medical journals. Through our recent alliance with
Rodale Inc., we have the right to offer the contents of over 150 healthy living
books and certain columns from Prevention magazine. We also have established a
Medical Advisory Board whose members contribute content and guide our editorial
staff in developing and reviewing content.
Integration of Content and Commerce. We integrate our content with our
products in a manner that allows our customers to make informed product
selections. Consumers can search our site for specific products and easily
access relevant information on those products, or they can research specific
health concerns, lifestyles or special interests and find complementary
products or our product recommendations, called "solution baskets," to address
particular health concerns.
Convenient and Private Shopping. Consumers can browse or shop on our site 24
hours a day, seven days a week in the privacy of their homes or offices. At
MotherNature.com, consumers can research and purchase products for personal
health concerns without facing retail store personnel. Consumers also can use
our personal shopper service or reorder previous selections with one click.
Broad, Expandable Product Assortment. Our product selection is substantially
larger than that offered by store-based retailers. We offer approximately
13,000 vitamins, supplements, minerals and other natural and healthy living
products on our site, and we can special order additional products through our
supplier relationships. Our online store is easily expandable to include
additional natural and healthy living products and related services.
1
Customer Information and Ongoing Communication. We use e-mail to provide
order status and shipping confirmation and to keep our members aware of
selected healthy living news relating to their past purchases. Because we
obtain demographic information on our members through the registration process,
we are able to refine our site and customize our product offerings.
Our Market Opportunity
The vitamins, supplements and minerals market is projected to grow as the
"baby boomer" population becomes increasingly concerned with aging and disease,
preventative health care and natural products. Sales of vitamins, supplements
and minerals totaled approximately $8.9 billion in 1998 and are forecasted to
grow at a compound annual rate of 13.3% to $16.6 billion in 2003, according to
Packaged Facts, a consumer products market research firm. As research studies
have indicated the health benefits of vitamins, supplements and minerals, the
percentage of U.S. adults who take vitamins has increased from 43% in 1993 to
56% in 1998, according to Packaged Facts. We believe there is also a large
market opportunity for us in other natural product categories beyond vitamins,
supplements and minerals, including personal care products, household products,
non-perishable foods, organic coffees and teas, sports nutrition, cosmetics,
baby care products and pet care products. For additional information, see
"Business--Industry Background."
Our Strategy
The key elements of our growth strategy are as follows:
. promote the memorable MotherNature.com brand name through an aggressive
advertising campaign, including a national television campaign that
commenced in late August 1999;
. establish MotherNature.com as the trusted authority for vitamins,
supplements, minerals and other natural and healthy living products
through our marketing efforts and our informative and authoritative
content;
. capitalize on the inherent need to replenish vitamins, supplements and
minerals by promoting repeat and complementary product purchases;
. enlist and provide financial incentives for other businesses in the
healthy living industry, such as health care providers and health clubs,
to refer their customers to our site;
. provide quality customer service and rapid product delivery through our
in-house order fulfillment facility, which we are expanding in order to
increase inventory levels of popular products; and
. expand our international presence in order to establish MotherNature.com
as a global brand.
Our Alliance with Rodale
We recently entered into a strategic content and cross-marketing alliance
with Rodale, a leading publisher of health related, active living magazines and
books. Through this relationship, we have the right to include online versions
of more than 150 Rodale books on vitamins, supplements and minerals, natural
healing, alternative medicine, home health and cooking, as part of an
expandable, fully searchable online library and database of health information.
The alliance with Rodale will also allow us to direct market to Rodale's
customer base of more than 25 million customers and to include advertisements
and promotional materials in Rodale's Prevention magazine and book shipments.
Our Offices
Our executive offices are located at One Concord Farms, 490 Virginia Road,
Concord, Massachusetts 01742, and our telephone number is (978) 929-2000. Our
Web site address is www.MotherNature.com. The information on our Web site is
not incorporated by reference into this prospectus and should not be considered
as part of this prospectus.
2
The Offering
Common stock offered.......................... 4,100,000 shares
Common stock outstanding after this offering.. 15,074,370 shares
Use of proceeds............................... We intend to use the net
proceeds of this offering for
advertising and marketing
expenditures, to fund operating
losses and for general
corporate purposes, including
expanding our product and
service offerings, enhancing
our infrastructure, Web site
development and working
capital. We may also use a
portion of the proceeds to
expand our business through
strategic alliances and
acquisitions.
Nasdaq National Market symbol................. MTHR
- --------
The number of shares of common stock outstanding after this offering is based
on shares of our common stock outstanding as of September 30, 1999. This
calculation:
. includes 9,055,392 shares of common stock to be issued upon the
conversion of all of our convertible preferred stock outstanding as of
September 30, 1999;
. excludes 1,367,008 shares of common stock issuable upon exercise of all
options outstanding under our 1998 Stock Plan as of September 30, 1999
with a weighted average exercise price of $8.93 per share (132,298 of
which were exercisable as of September 30, 1999); and
. excludes 159,938 shares of common stock issuable upon exercise of all of
our warrants outstanding as of September 30, 1999.
Conventions Which Apply to this Prospectus
Unless we indicate otherwise, all information in this prospectus reflects the
following:
. no exercise by the underwriters of their over-allotment option to
purchase up to 615,000 additional shares of common stock;
. the conversion of all of our convertible preferred stock outstanding as
of September 30, 1999 into 9,055,392 shares of our common stock upon the
closing of this offering; and
. a 1 for 7.463 reverse stock split effected prior to consummation of this
offering.
References in this prospectus to "MotherNature.com," "we," "our" and "us"
refer to MotherNature.com, Inc., a Delaware corporation. References to the
"offering" refer to the initial public offering of our common stock being made
by this prospectus. We were incorporated in Pennsylvania in December 1995 and
we reincorporated in Delaware in June 1998. We have applied for federal
registration for, among others, the marks "MotherNature.com" combined with the
MotherNature.com logo, the MotherNature.com logo, "Go Ask Mother@" and "Your
Healthy Living Headquarters." "Natural products, healthy advice" is also one of
our trademarks. All other trademarks, trade names and service marks appearing
in this prospectus are the property of their respective owners.
3
Summary Financial Data
The following tables set forth summary financial data for our company. You
should read this information together with the financial statements and the
notes to those statements appearing elsewhere in this prospectus and the
information under "Selected Financial Data" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
Year Ended Nine Months Ended
December 31, September 30,
-------------------------------- -------------------------
1996 1997 1998 1998 1999
-------- --------- ----------- ----------- ------------
(unaudited)
Statement of Operations
Data:
Net sales............... $ 21,489 $ 193,064 $ 476,549 $ 371,160 $ 2,589,048
Cost of sales........... 10,681 71,484 417,998 225,423 2,263,738
-------- --------- ----------- ----------- ------------
Gross profit............ 10,808 121,580 58,551 145,737 325,310
Operating expenses...... 91,489 272,862 7,135,461 3,990,980 34,771,081
-------- --------- ----------- ----------- ------------
Operating loss.......... (80,681) (151,282) (7,076,910) (3,845,243) (34,445,771)
Net loss................ $(80,681) $(159,532) $(7,012,429) $(3,810,205) $(33,786,035)
======== ========= =========== =========== ============
Basic and diluted net
loss per common
share(1)............... $ (0.19) $ (0.25) $ (10.43) $ (5.69) $ (39.89)
======== ========= =========== =========== ============
Shares used to compute
basic and diluted net
loss per common
share(1)............... 430,474 650,607 672,289 669,972 846,953
Pro forma basic and
diluted net loss per
common share(1)(2)..... $ (2.83) $ (4.54)
=========== ============
Shares used to compute
pro forma basic and
diluted net loss per
common share(1)(2)..... 2,479,964 8,523,440
September 30, 1999
--------------------------
Pro Forma
Actual As Adjusted(3)
----------- --------------
(unaudited)
Balance Sheet Data:
Cash and cash equivalents............................ $27,647,394 $76,466,394
Working capital...................................... 17,934,634 66,753,634
Total assets......................................... 49,834,599 98,653,599
Total long-term debt, net of current portion......... 12,300 12,300
Total convertible preferred stock.................... 647,450 --
Total shareholders' equity........................... 37,401,117 86,220,117
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(1) Please see the financial statements and the notes to those statements
appearing elsewhere in this prospectus for the determination of shares
used in computing basic and diluted net loss per common share and pro
forma basic and diluted net loss per common share.
(2) The pro forma data give effect to the conversion of all of our convertible
preferred stock outstanding as of September 30, 1999 into 9,055,392 shares
of our common stock upon the closing of this offering.
(3) The pro forma as adjusted data give effect to the conversion of all of our
convertible preferred stock outstanding as of September 30, 1999 into
9,055,392 shares of our common stock upon the closing of this offering and
reflect the sale of 4,100,000 shares of common stock by us in this
offering at the initial public offering price of $13.00 per share, after
deducting underwriting discounts and commissions and estimated offering
expenses payable by us.
4
RISK FACTORS
Any investment in our common stock involves a high degree of risk. You should
carefully consider the following information about these risks, together with
the other information contained in this prospectus, before you decide whether
to buy our common stock. If any of the following risks actually occur, our
business, results of operations and financial condition would likely suffer. In
any such case, the market price of our common stock could decline, and you may
lose all or part of the money you paid to buy our common stock.
The risks and uncertainties described below are not the only ones we face.
Additional risks and uncertainties, including those not presently known to us
or that we currently deem immaterial, may also result in decreased revenues,
increased expenses or other events which could result in a decline in the price
of our common stock.
Risks Related to Our Business
Our business is difficult to evaluate because we have a limited operating
history under our current business model.
Although we were organized in December 1995, our current management team
joined us after June 1998 and our current, redesigned Web site was launched in
late 1998. Accordingly, an investor in our common stock must consider the
challenges, risks and uncertainties frequently encountered by early-stage
companies using new and unproven business models in new and rapidly evolving
markets. These challenges include our ability to:
. execute on our business model;
. increase brand recognition;
. manage growth in our operations;
. expand our customer base cost-effectively;
. retain customers;
. manage inventory levels effectively;
. upgrade and enhance our Web site, transaction-processing systems, order
fulfillment capabilities and inventory management systems;
. access additional capital when required;
. develop and renew strategic relationships with companies in the
vitamins, supplements, minerals and natural and healthy living products
industry, such as suppliers and content providers; and
. attract and retain key personnel.
We cannot be certain that our business model will be successful or that we will
successfully address these and other challenges, risks and uncertainties.
5
Consumers of vitamins, supplements, minerals and other natural and healthy
living products may not purchase products from our site, which would reduce our
revenues and prevent us from becoming profitable.
Due to our limited operating history, we have not proven an ability to
attract and retain a high volume of online customers. We may not be able to
convert a large number of customers from traditional shopping methods to online
shopping for vitamins, supplements, minerals and other natural and healthy
living products. Even if we are successful at attracting online customers, we
expect it will take several years to build a critical mass of repeat customers.
If we do not attract and retain a high volume of online customers at a
reasonable cost, we will not be able to increase our revenues or achieve
profitability. Specific factors that could prevent widespread customer
acceptance of our store include:
. lack of consumer awareness of our online store because of our relatively
short market presence under our current business model;
. customer concern about the privacy of personal health information;
. pricing that does not meet customer expectations as we expand our
product offerings and enhance our marketing efforts;
. incorrectly filled orders or damaged products resulting from our
transition to new order fulfillment systems; and
. delayed response to customer service requests if we fail to adequately
increase our customer service staff.
If our brand does not rapidly achieve broad recognition, we may lose the
opportunity to build a critical mass of customers necessary to achieve
increased sales and market share.
We believe that we must achieve increased sales and market share to become
profitable. Accordingly, we have spent and intend to continue to spend
significant amounts on an aggressive brand-enhancement strategy, which includes
advertising, promotional programs and public relations activities. Our brand
promotion efforts may not be successful or may not sufficiently increase our
revenues to cover our advertising and promotional expenses. In addition, even
if our brand recognition increases, the number of new users or transactions in
our online store may not increase.
We anticipate our history of losses will continue, which may decrease the value
of our stock.
We believe that we will continue to incur operating losses for the
foreseeable future and that the rate at which we will incur such losses will
increase significantly from current levels. As of September 30, 1999, we had an
accumulated deficit of approximately $41.0 million, and we have not achieved
profitability. We incurred net losses of approximately $33.8 million for the
nine months ended September 30, 1999 and approximately $7.0 million for the
fiscal year ended December 31, 1998. Specifically, we intend to substantially
increase our costs and operating expenses related to:
. intensifying our brand development efforts through advertising and other
marketing activities;
. expanding our product offerings and Web site content;
. providing promotional benefits to our customers, such as product
discounts and free shipping on large orders;
. upgrading our Web site, transaction-processing systems, order
fulfillment capabilities and inventory management systems;
6
. expanding our distribution and warehousing facilities;
. developing and renewing strategic relationships with companies in the
vitamins, supplements, minerals and natural and healthy living products
industry, such as content providers and vendors; and
. employing additional personnel as our business expands.
Because we will spend these amounts before we receive any incremental revenues
from these efforts, our losses will be greater than the losses we would incur
if we developed our business more slowly. In addition, we may find that these
efforts are more expensive than we currently anticipate, which would further
increase our losses.
Disappointing quarterly revenue or operating results could cause our stock
price to fall.
Our quarterly revenue and operating results have fluctuated significantly in
the past and may fluctuate significantly in the future due to a variety of
factors, including:
. fluctuations in the number of visitors to our Web site as a result of
the relative successes or failures of our advertising campaign and our
ability to convert visitors into customers;
. demand for our products;
. our use of advertising, discount pricing and promotions;
. amount and timing of our operating costs and capital expenditures, which
are currently difficult to predict;
. introductions by our competitors of new or enhanced Web sites, products
or services;
. fluctuations in shipping costs or delivery times based on changes in the
market for distribution services;
. management of our inventory levels and fulfillment operations as we
introduce new inventory and order fulfillment staff and systems;
. price competition and fluctuations in the wholesale prices of the
products we sell as market demand for our products and competition
increase;
. changes in the mix of products we sell in response to changes in
customer demand;
. shifts in research findings, media publicity and consumer perception
regarding vitamins, supplements and minerals;
. expenses related to potential strategic relationships or acquisitions of
content, technology or businesses;
. changes in or enforcement of government regulations affecting our
business;
. changes in our management team and key personnel; and
. continuing fluctuations in general economic conditions and economic
conditions specific to the Internet, electronic commerce and the
vitamins, supplements, minerals and natural and healthy living products
industries as use and visibility of vitamins, supplements and minerals
increase.
Our limited operating history makes it difficult to assess the impact of
these factors on our operating results.
7
Extensive federal, state and local government regulations may restrict the way
we sell our products, resulting in restrictions on the products and content we
offer our customers and significant additional expenses.
The laws, regulations and enforcement policies governing our dietary
supplement products are relatively new and still evolving and we cannot predict
what enforcement positions the FDA or other governmental agencies may take with
respect to our selling methods. In general, the dietary supplement industry has
adopted more aggressive interpretations of these laws than have the relevant
regulatory agencies. We cannot be certain that our attempts, or those of our
suppliers, to comply with laws and regulations in this area are or will be
deemed sufficient by the appropriate regulatory agencies. Enforcement actions
by any of these agencies can result in civil and criminal penalties, an
injunction to stop or modify certain selling methods, seizure of our products,
adverse publicity or voluntary recalls and labeling changes. If the FDA, FTC or
other federal or state governmental agency were to undertake an enforcement
action against us, it could cause an immediate decrease in our revenues, cause
us to incur significant additional expenses and result in a decrease in our
stock price. State professional licensing bodies also may object to the
provision of health-related information or advice on our site. Our efforts to
comply with existing laws and regulations may be costly, may force us to change
our selling strategy and may not be successful. We cannot assure you that we
will be able to comply with any existing or future laws, regulations,
interpretations or applications without incurring significant costs or
adjusting our business model. A more detailed discussion of the government
regulations affecting our business is included in this prospectus under the
heading "Business--Regulatory Environment."
We may fail to compete effectively in our market, which could result in lower
revenues or loss of market share.
The electronic commerce industry is new, rapidly evolving and intensely
competitive, and we expect competition to intensify in the future. If we fail
to attract and retain a large customer base and our competitors establish a
market position more prominent than ours, we could experience declines in our
revenue and a loss of market share. Barriers to entry are minimal and current
and new competitors can launch sites at a relatively low cost. In addition, the
vitamins, supplements, minerals and natural and healthy living products market
is very competitive and highly fragmented, with no clear dominant leader and
increasing public and commercial attention. We compete with a variety of other
companies, including traditional vitamins, supplements, minerals and natural
and healthy living products retailers, the online retail initiatives of several
such traditional retailers and numerous other companies. A more detailed
discussion regarding the competition we face is included in this prospectus
under the heading "Business--Competition."
If we are unable to adapt to rapid technological change, our customers may
cease buying our products or forego the use of our services and use those of
our competitors.
To remain competitive, we must continue to enhance and improve the
functionality and features of our online store. If our competitors introduce
new products and services embodying new technologies, or if new industry
standards and practices emerge, our existing Web site and proprietary
technology and systems may be rendered obsolete. Our future success will depend
on our ability to:
. enhance our existing services;
. internally develop and/or license from third parties new services and
technologies; and
. respond to technological advances and emerging industry standards and
practices on a cost-effective and timely basis.
8
Moreover, we may use new technologies ineffectively or fail to adapt our Web
site, transaction-processing systems, order fulfillment infrastructure and
inventory management systems to customer requirements or emerging industry
standards.
If we are unable to protect our intellectual property adequately, we could lose
our competitive advantage in the vitamins, supplements and minerals and natural
and healthy living products market.
Our trademarks, service marks, copyrights, trade dress, which is the
appearance and packaging of our products, trade secrets and similar
intellectual property are critical to our success. The unauthorized
reproduction or other misappropriation of our trademarks or other intellectual
property could diminish the value of our proprietary rights or goodwill. We
rely upon a combination of trademark and copyright law, trade secret protection
and confidentiality or license agreements with our employees, affiliates and
others to protect our proprietary rights. We have submitted trademark and
service mark applications for our name combined with our logo, and these
applications are pending. Effective trademark, service mark, copyright and
trade secret protection may not be available, and the steps we have taken and
may take in the future to protect our proprietary rights may not be adequate.
For instance, we may not be able to register our name combined with our logo as
a federal trademark because there are other companies using the words "mother
nature" who may have prior rights in those words. In addition, we may not be
able to prevent other people from using the words "mother nature" in their
businesses. It is possible that others could use the words "mother nature" in
such a way as to damage the goodwill associated with our business or try to
prevent the use of our name or trademark. In addition, we license our
trademarks and other intellectual property to third parties, and we cannot be
certain that such licensees will not take actions that harm the value of our
proprietary rights.
If we are unable to prevent third parties from acquiring domain names that are
similar to, infringe upon or otherwise decrease the value of our domain names,
we could lose our competitive advantage in the vitamins, supplements and
minerals and natural and healthy living products market.
We currently hold several Web domain names relating to our brand, including
"mothernature.com." The acquisition and maintenance of domain names generally
is regulated by governmental agencies and their designees. The regulation of
domain names in the United States and abroad is expected to change in the near
future. Governing bodies may establish additional top-level domains, appoint
additional domain name registrars or modify the requirements for holding domain
names. As a result, we may be unable to acquire or maintain relevant domain
names in all countries in which we conduct business and other parties may use
domain names similar to ours. Furthermore, the relationship between regulations
governing domain names and laws protecting trademarks and similar proprietary
rights is unclear.
If we do not successfully expand our distribution operations, Web site and
related information systems to accommodate increases in customer demand, our
revenues may fall below expectations.
If we do not successfully expand our distribution operations to accommodate
increases in customer demand, we may not be able to increase our revenues in
accordance with the anticipated expectations of securities analysts and
investors. The planned expansion of our distribution operations may cause
disruptions in our business. Our historical distribution operations in
Southhampton, Pennsylvania were not adequate to accommodate significant
increases in customer demand. We recently moved all of our distribution
operations to a facility in Springfield, Massachusetts, from which we began
distributing products in July 1999. Our ability to effectively process and ship
customer orders from this new facility is uncertain. Due to significant
increases in orders, we have recently experienced delays in processing
shipments. If we do not effectively manage the growth of our new distribution
center, we could lose customers.
9
Moreover, our future success will depend in part on our ability to rapidly
expand our Web site, transaction-processing systems, order fulfillment
infrastructure and inventory management systems without systems interruptions
in order to accommodate increased traffic and demand. We are currently
implementing new technical and operational systems, including a new order
processing, inventory management, shipping and billing software package to
accommodate anticipated increases in customer traffic and order demand. In
addition, we recently installed a new accounting and financial reporting system
and are currently in the process of integrating this system with our other
information systems. Any inability to scale our systems may cause unanticipated
system disruptions, slower response times, degradation in customer service
levels, impaired quality and speed of order fulfillment or delays in reporting
accurate financial information. We are not certain that we will be able to
project the rate or timing of increases, if any, in the use of our Web site
accurately or promptly enough to permit us to effectively upgrade and expand
our transaction-processing systems or to integrate smoothly any newly developed
or purchased modules with our existing systems.
Expanding the breadth and depth of our product and service offerings is
expensive and difficult, and these efforts may not be profitable or result in
increased sales.
We intend to expand the number of products we offer on our site by promoting
new or complementary products or services. We cannot be certain that we will be
able to expand our product and service offerings in a cost-effective or timely
manner. Furthermore, any new product or service offering that is not favorably
received by consumers could damage the reputation of our brand. The lack of
market acceptance of our efforts to expand offerings or our inability to
generate satisfactory revenues from such expanded offerings could result in
decreased revenues, price reductions, reduced margins and loss of market share.
In addition, expansion of our offerings could strain our management, financial
and operational resources. For example, we may need to incur significant
marketing expenses, develop relationships with new fulfillment partners or
manufacturers or comply with new regulations.
If we fail to properly manage the growth of our inventory levels, we may be
unable to keep pace with customer demand or to sell our excess inventory.
We plan to increase the number and range of products that we stock in
inventory in order to ensure that we can promptly deliver products to our
customers. Many of our products have a limited shelf life, and we may be unable
to sell inventory that we have stored for an extended period of time. In the
event that one or more of the products we stock do not achieve widespread
consumer acceptance, we may be required to take inventory markdowns. In
addition, the market for nutritional supplements is characterized by sudden
changes in consumer tastes. We must accurately predict these trends and stock
sufficient quantities of popular vitamins, supplements, minerals and other
products and not overstock unpopular products.
If our existing technical and operational systems fail, we could experience
interruptions or delays in our service or data loss, and could be unable to
accept and fulfill customer orders.
We have experienced periodic systems interruptions which we believe may
continue to occur. Our systems and operations, including our fulfillment
operations, are vulnerable to damage or interruption from fire, flood,
earthquake, power loss, telecommunications failure, break-ins, vandalism and
similar events. Substantially all of our product development and information
management systems are in facilities we lease in Massachusetts. All of our
inventory is stored in facilities we lease in Massachusetts. In addition,
substantially all of our computer and communications hardware systems are
located at a third-party facility in Massachusetts. We have no formal disaster
recovery plans, and our insurance may not adequately compensate us for losses
that may occur. The occurrence of a natural disaster or other unanticipated
problems at our facilities in Massachusetts, or at the third-party facility in
Massachusetts, could cause interruptions or delays in our service or data loss,
or could render us unable to accept and fulfill customer orders. In addition,
any failure by the third-party facility to provide the data communications
capacity we require could result in interruptions in our service.
10
Our ability to increase our customer base and our sales depends on the
continuing contribution of our key personnel and our ability to attract and
retain other qualified employees in the future.
We may be unable to retain our key employees or attract and retain other
highly qualified employees in the future due to the intense competition for
qualified personnel among Internet related businesses. If we were to lose the
services of Michael I. Barach, our President, Chief Executive Officer and a
director, and Donald J. Pettini, our Chief Technology Officer or any of our
other executive officers or key employees, many of whom joined us since June
1998, we might not be able to increase our customer base and our sales. Any
officer or employee can terminate his or her relationship with us at any time.
We also do not have "key person" life insurance policies covering any of our
employees. Competition for personnel is intense, and qualified technical
personnel are likely to remain a limited resource for the foreseeable future.
Locating candidates with the appropriate qualifications, particularly in the
desired geographic location, can be costly and difficult. We may not be able to
hire the necessary personnel to implement our business strategy, or we may need
to provide higher compensation to such personnel than we currently anticipate.
If we fail to attract and retain sufficient numbers of highly skilled
employees, we may be unable to attract customers and increase our sales.
The loss of third-party content providers could decrease revenues, increase our
expenses and result in a decrease in our stock price.
We believe that consumers become interested in purchasing our products in
part because of the information we include on our Web site regarding health
conditions, herbal and homeopathic remedies, drug interactions and our
products, much of which is licensed from third parties, such as
Healthnotes, Inc., Rodale and American Botanical Council. The loss of this
content could require us to develop similar content or to obtain content that
is of lower quality or at a higher cost. In addition, we cannot be certain that
we will be able to license additional content on favorable terms or at all.
We depend on a limited number of third-party suppliers for the products we
require to meet customer demands and if we fail to develop or maintain our
relationships with these or our other vendors, the products we offer could
cease to be available to us or could be available only at higher cost or after
a long delay.
We do not have long-term contracts with any of our suppliers. We cannot
assure you that in the future we will be able to procure sufficient quantities
of our products on acceptable commercial terms. In 1998, two suppliers,
Reliance Vitamin Company and Super Nutrition Distributors, accounted for 51% of
our inventory purchases, and in 1997, Reliance Vitamin Company accounted for
44% of the inventory we purchased. Furthermore, we purchase nearly all of our
private label products through one supplier, Reliance Vitamin Company.
The failure of third-party delivery services to promptly deliver products would
impair our ability to maintain good relationships with existing customers,
attract new customers and generate sales.
We rely on third-party carriers, such as the United States Postal Service,
UPS and Federal Express, for product shipments, including shipments to and from
our order fulfillment facility. We are therefore subject to the risks,
including employee strikes and delays due to inclement weather, associated with
these carriers' ability to provide delivery services to meet our shipping
needs.
Product liability claims against us could result in adverse publicity and
potentially significant monetary damages.
Like other retailers, distributors and manufacturers of products that are
ingested, we face an inherent risk of exposure to product liability claims in
the event that the use of the products we sell results in injury. We may be
subjected to various product liability claims, including claims that the
products we sell contain contaminants, are improperly labeled or include
inadequate instructions as to use or inadequate warnings
11
concerning side effects and interactions with other substances. We cannot
predict whether product liability claims will be brought against us in the
future or the effect of any resulting adverse publicity on our business.
Moreover, we may not have adequate resources in the event of a successful claim
against us. We do not maintain product liability insurance and do not have
formal indemnification arrangements with the third-party vendors from which we
source our products. Further, our general liability insurance may not cover
product liability claims. If our insurance protection is inadequate and we are
not indemnified by our third-party vendors, the successful assertion of product
liability claims against us could result in potentially significant monetary
damages.
Although many of the ingredients in our products are vitamins, minerals,
herbs and other substances for which there is a long history of human
consumption, some of our products contain innovative ingredients or
combinations of ingredients. There is little long-term experience with human
consumption of some of these innovative product ingredients or combinations in
concentrated form. In addition, interactions of these products with other
similar products, prescription medicines and over-the-counter drugs have not
been fully explored. Although the manufacturer may perform research and tests
in connection with the formulation and production of the products that we sell,
there are no conclusive clinical studies regarding many of our products.
We may be liable for content we provide on our Web site or which is accessed
from our Web site, which could expose us to potentially significant monetary
damages.
As a publisher of Internet content, we face potential liability for
negligence, copyright, patent or trademark infringement, defamation or other
claims based on the nature and content of materials that we publish or
distribute. In the past, plaintiffs have brought such claims and sometimes
successfully litigated them against online services. Although we carry general
liability insurance, our insurance may not cover claims of these types or may
be inadequate to indemnify us for all liability imposed on us. We could be
exposed to potentially significant monetary damages if we were held liable
based on our Internet content.
If there is unfavorable publicity regarding nutritional supplements, our sales
will likely decline.
We believe the vitamins, supplements and minerals market is affected by
national media attention regarding the consumption of nutritional supplements.
Future research reports or publicity that are perceived as less favorable or
that question earlier research or publicity could result in a decline in our
sales. Because of our dependence upon consumer perceptions, adverse publicity
associated with illness or other undesirable effects resulting from the
consumption of the products we sell or any similar products distributed by
other companies, whether or not accurate, also could damage the trust our
customers have in our products and could result in a decline in our sales.
Unfavorable publicity could arise even if the adverse effects associated with
products resulted from consumers' failure to consume such products
appropriately.
Disruptions resulting from the year 2000 problem could require us to incur
significant unanticipated expenses and result in operating losses.
Many existing computer programs use only two digits to identify a year. These
programs were designed and developed without addressing the impact of the
upcoming change in the century. If not corrected, many computer software
applications could fail or create erroneous results by, at or beyond the year
2000. We use software, computer technology and other services internally
developed and provided by third-party vendors that may fail due to the year
2000 problem. These failures could cause disruptions of our operations,
including a temporary inability to process customer orders, operate our Web
site or engage in similar ordinary business activities. We may be required to
incur unanticipated expenses to restore our operations to full functionality,
and these disruptions and expenses could result in operating losses.
12
Our operations also depend on the performance of operating software and
systems used by our vendors and service providers. We cannot assure you that
our vendors and service providers have, or will have, operating software and
systems that are year 2000 compliant. Year 2000-related failures in the
software or systems of our vendors or third-party service providers could
interrupt our operations or require us to incur significant unanticipated
expenses. In addition, disruptions caused by year 2000 problems could affect
Internet usage generally, which also could require us to incur significant
unanticipated expenses and result in operating losses.
We do not expect to pay dividends, and investors should not buy our common
stock expecting to receive dividends.
We have never declared or paid any cash dividends on our capital stock. We
presently intend to retain future earnings, if any, to finance the expansion of
our business and do not expect to pay any cash dividends in the foreseeable
future. Consequently, you only will realize an economic gain on your investment
in our common stock if the price appreciates. You should not purchase our
common stock with the expectation of receiving cash dividends.
We are subject to anti-takeover provisions in our charter, by-laws and Delaware
law that could delay or prevent an acquisition of our company, even if the
acquisition would be beneficial to our stockholders.
Certain provisions of our certificate of incorporation, our by-laws and
Delaware law could make it more difficult for a third party to acquire us, even
if doing so would be beneficial to our stockholders. Because of these
provisions, you might not be able to receive a premium on your investment. For
additional information on these anti-takeover provisions, please refer to the
information in this prospectus under the heading "Description of Securities."
Risks of Doing Business Over the Internet
If use of the Internet and growth of the online vitamins, supplements, minerals
and other natural and healthy living products market do not continue, we may
not achieve the critical mass of customers necessary for sustaining revenues
and achieving profitable operations.
Our future revenues and profits, if any, substantially depend upon the
widespread acceptance and use of the Internet as an effective medium of
business and communication by our target consumers. Rapid growth in the use of
and interest in the Internet has occurred only recently. As a result,
acceptance and use may not continue to develop at historical rates, and a
sufficiently broad base of consumers may not use the Internet and other online
services as a medium of commerce. In addition, the Internet may not be accepted
as a viable long-term commercial marketplace for a number of reasons, including
potentially inadequate development of the necessary network infrastructure or
delayed development of enabling technologies and performance improvements. Our
continued growth will depend, in large part, upon third parties maintaining the
Internet infrastructure to provide a reliable network backbone with the speed,
data capacity, security and hardware necessary for reliable Internet access and
services.
Further, the online market for vitamins, supplements, minerals and other
natural and healthy living products is in its infancy, and our participation in
this market began growing only after we launched our redesigned Web site in
late 1998. The market is significantly less developed than the online market
for books, auctions, music, software and numerous other consumer products. Even
if use of the Internet and electronic commerce continues to increase, the rate
of growth, if any, of the online vitamins, supplements, minerals and other
natural and healthy living products market could be significantly less than the
online market for other products. Our rate of revenue growth and prospects for
profitability could therefore be significantly less than that of other online
merchants.
13
If we fail to provide adequate electronic commerce security or fail to control
credit card fraud, we could be subject to increased operating costs, as well as
claims, litigation or other potential liability.
Since nearly all of our revenues are derived from credit card transactions,
consumer concerns regarding the security of transactions conducted on our site
and users' privacy may inhibit the growth of use of our site. To transmit
confidential information securely, such as customer credit card numbers, we
rely on encryption and authentication technology that we license from third
parties. We cannot predict whether we will experience compromises or breaches
of the technologies we use to protect customer transaction data. Furthermore,
our servers may be vulnerable to computer viruses, physical or electronic
break-ins and similar disruptions. We may need to expend significant additional
capital and other resources to protect against security breaches or alleviate
problems caused by any such breaches. We cannot guarantee that security
breaches will not occur. Any penetration of our network security or
misappropriation of our users' personal or credit card information could
subject us to liability. We may be liable for claims based on unauthorized
purchases with credit card information, impersonation or other similar fraud
claims. Claims also could be based on other misuse of personal information,
including use for unauthorized marketing purposes. These claims could result in
costly litigation.
Under current credit card practices, merchants are liable for fraudulent
credit card transactions where, as is the case with the transactions we
process, the merchant does not obtain a cardholder's signature. A failure to
adequately control fraudulent credit card transactions could result in
increased operating costs, as well as claims, litigation and other potential
liability.
Privacy concerns may limit the information we can gather, which could limit the
effectiveness of our sales and marketing efforts and cause us to incur
significant additional expenses.
Web sites typically place "cookies" on a user's hard drive without the user's
knowledge or consent. Although some companies refuse to use cookies, we use
them for a variety of reasons, including the collection of data derived from
the user's Internet activity. We use this data to better target our sales and
marketing efforts to our current and prospective customer base. Accordingly,
any reduction or limitation in the use of cookies could limit the effectiveness
of our sales and marketing efforts. Most currently available Web browsers allow
users to remove cookies at any time or to prevent cookies from being stored on
their hard drives. In addition, some commentators, privacy advocates and
governmental bodies have suggested limiting or eliminating the use of cookies.
For example, the European Union recently adopted a directive addressing data
privacy that may limit the collection and use of certain information regarding
Internet users. This directive may limit our ability to target advertising or
collect and use information in certain European countries. In addition, the FTC
and several states have investigated the use by certain Internet companies of
personal information. We could incur significant additional expenses if new
regulations regarding the use of personal information are introduced or if our
privacy practices are investigated.
14
Our business is subject to government regulation of the Internet and other
legal uncertainties which could prevent our business from growing or expose us
to unanticipated liabilities.
Existing or future legislation could limit growth in use of the Internet,
which would curtail our revenue growth. Statutes and regulations directly
applicable to Internet communications, commerce and advertising are becoming
more prevalent. The law remains largely unsettled, however, even in areas where
there has been legislative action. It may take years to determine whether and
how existing laws governing intellectual property, privacy, libel and taxation
apply to the Internet, electronic commerce and online advertising. In addition,
the growth and development of electronic commerce may prompt calls for more
stringent consumer protection laws, both in the United States and abroad.
Congress recently passed laws regarding online children's privacy, copyrights
and taxation. In addition, we do not currently collect sales or other similar
taxes for physical shipments of goods into states other than Massachusetts and
Pennsylvania. However, local, state or foreign jurisdictions may seek to impose
sales tax collection obligations on us. If one or more states or any foreign
country successfully asserts that we should collect sales or other taxes on the
sale of our products, it could also prevent our business from growing or expose
us to unanticipated liabilities.
Risks Associated with this Offering
Our management has broad discretion over the use of proceeds from this
offering.
Presently, we intend to use the majority of the proceeds from this offering
for increased advertising and marketing expenditures. The remaining proceeds
will be used to fund operating losses and for general corporate purposes,
including expanding our product and service offerings, enhancing our
infrastructure, Web site development and working capital. We also may use a
portion of the proceeds to expand our business through strategic alliances and
acquisitions. We have not yet determined the amount of net proceeds to be used
specifically for any of the foregoing purposes. As a result, investors in this
offering will be relying on management's judgment with only limited information
about its specific intentions regarding the use of proceeds. We cannot assure
you that the proceeds will be invested to yield a favorable return. Additional
information regarding the ways in which we intend to spend the proceeds of this
offering is included in this prospectus under the heading "Use of Proceeds."
Our officers and directors will control 24.4% of our common stock and will be
able to significantly influence corporate actions.
After this offering, our executive officers, directors and entities
affiliated with them will control approximately 24.4% of our common stock. As a
result, these stockholders, acting together, will be able to significantly
influence all matters requiring approval by our stockholders, including the
election of directors and the approval of mergers or other business combination
transactions.
There is no prior public market for our common stock, and you may not be able
to resell shares of our common stock for a profit.
There has not been a public market for our common stock. We cannot predict
the extent to which investor interest in our company will lead to the
development of an active, liquid trading market. Active trading markets
generally result in lower price volatility and more efficient execution of buy
and sell orders for investors. The initial public offering price for the shares
was determined by negotiations between us and the representatives of the
underwriters and may not be indicative of prices that will prevail in the
trading market. The market price of the common stock may decline below the
initial public offering price. A more detailed discussion of the factors
considered in determining the initial public offering price is included in this
prospectus under the heading "Underwriting."
15
We are likely to require additional financing and may not be able to raise
additional financing on favorable terms or at all.
We currently anticipate that the net proceeds of this offering, together with
current cash and cash equivalents, will be sufficient to meet our anticipated
needs for advertising and marketing expenditures, funding operating losses and
general corporate purposes through at least the next 12 months. We anticipate
that we are likely to need additional financing to execute on our business
model thereafter or sooner if we need to respond to business contingencies.
Such contingencies may include the need to:
. fund additional advertising expenditures;
. develop new or enhance existing site content, features or services;
. enhance our operating infrastructure;
. respond to competitive pressures; or
. acquire complementary businesses or necessary technologies.
If we raise additional funds through the issuance of equity or convertible
debt securities, the percentage ownership of our stockholders will be reduced,
and these newly-issued securities may have rights, preferences or privileges
senior to those of existing stockholders, including those acquiring shares in
this offering. We cannot assure you that additional financing will be available
on terms favorable to us, or at all. If adequate funds are not available or are
not available on acceptable terms, our ability to fund our operations, take
advantage of unanticipated opportunities, develop or enhance our site content,
features or services, or otherwise respond to competitive pressures would be
significantly limited. For a further discussion, please see "Use of Proceeds"
and "Management's Discussion and Analysis of Financial Condition and Results of
Operation--Liquidity and Capital Resources."
Market prices of emerging Internet companies have been highly volatile, and the
market for our stock may exhibit volatility as well.
The stock market has experienced significant price and trading volume
fluctuations, and the market prices of technology companies, particularly
Internet companies, have been extremely volatile. Recent initial public
offerings by Internet companies have been accompanied by exceptional share
price and trading volume changes in the first days and weeks after the
securities were released for public trading. Investors may not be able to
resell their shares at or above the initial public offering price. In the past,
following periods of volatility in the market price of a public company's
securities, securities class action litigation has often been instituted
against that company. Such litigation could result in substantial costs and a
diversion of management's attention and resources.
The reliability of the market data included in this prospectus is uncertain.
Since we are a relatively new company and operate in a new and rapidly
changing market, we have included market data in this prospectus from industry
publications, including Packaged Facts and International Data Communications.
Industry publications generally state that the information contained in these
publications has been obtained from sources believed to be reliable, but that
its accuracy and completeness is not guaranteed. Although we believe market
data used in this prospectus is reliable, it has not been independently
verified and we cannot assure you of its reliability.
16
New investors will suffer immediate and substantial dilution in the net
tangible book value of their shares.
The initial public offering price is substantially higher than the net
tangible book value per share of the common stock. Therefore, you will incur
immediate dilution in net tangible book value of $8.39 per share. You may incur
additional dilution if holders of stock options exercise their options or if
warrantholders exercise their warrants to purchase common stock. Additional
information regarding the dilution to investors in our initial public offering
is included in this prospectus under the heading "Dilution."
The large number of shares eligible for public sale after this offering could
cause our stock price to decline.
The market price of our common stock could decline as a result of sales by
our existing stockholders of a large number of shares of our common stock in
the market after this offering or the perception that such sales could occur.
These sales also might make it more difficult for us to sell equity securities
in the future at a time and price that we deem appropriate. Please see the
information in this prospectus under the heading "Shares Eligible for Future
Sale" for a description of sales that may occur in the future.
Forward-looking statements contained in this prospectus may not be realized.
This prospectus contains forward-looking statements that involve risks and
uncertainties. These forward-looking statements are often accompanied by words
such as "believe," "anticipate," "plan," "expect" and similar expressions.
These statements include statements about the market opportunity for online
sales of vitamins, supplements, minerals and other natural and healthy living
products, our business strategy, competition and expected expense levels. Our
actual results could differ materially from those expressed or implied by these
forward-looking statements as a result of various factors, including the risk
factors described above and elsewhere in this prospectus.
17
USE OF PROCEEDS
Our net proceeds from the sale of shares of common stock offered by us are
estimated to be approximately $48.8 million, after deducting underwriting
discounts and commissions and estimated offering expenses payable by us. If the
underwriters' over-allotment option is exercised in full, we estimate that the
net proceeds we will receive will be approximately $56.3 million.
We intend to use the majority of the proceeds from this offering for
advertising and marketing expenditures. We intend to use the remaining proceeds
to fund operating losses and for general corporate purposes, including
expanding our product and service offerings, enhancing our infrastructure, Web
site development and working capital.
We believe opportunities may exist from time to time to expand our current
business through strategic alliances or through acquisitions of complementary
companies, products or technologies. We may use a portion of the proceeds for
these purposes. We are not currently a party to any contracts, letters of
intent, commitments or agreements and are not currently engaged in active
negotiations with respect to any acquisitions.
We have not yet determined the amount of net proceeds to be used specifically
for any of the foregoing purposes. Accordingly, our management will have
significant flexibility in applying the net proceeds of the offering. Pending
the uses described above, we intend to invest the net proceeds in high-quality,
short-term, interest-bearing securities.
18
CAPITALIZATION
The following table shows our capitalization as of September 30, 1999:
. on an actual basis;
. on a pro forma basis to reflect the automatic conversion of all of our
convertible preferred stock outstanding as of September 30, 1999 into
9,055,392 shares of our common stock upon the closing of this offering;
and
. on a pro forma as adjusted basis to reflect the sale of the 4,100,000
shares of common stock by us in this offering at the initial public
offering price of $13.00 per share, after deducting underwriting
discounts and commissions and estimated offering expenses payable by us.
This information should be read in conjunction with "Management's Discussion
and Analysis of Financial Condition and Results of Operation" and our financial
statements and the notes to those statements appearing elsewhere in this
prospectus.
September 30, 1999
----------------------------------------
Pro Forma
Actual Pro Forma As Adjusted
------------ ------------ ------------
Long-term portion of notes payable
and capital lease obligations....... $ 12,300 $ 12,300 $ 12,300
Preferred stock:
Series A -- 23,811,358 shares
authorized; 23,316,097 shares
issued and outstanding actual; no
shares issued and outstanding pro
forma and pro forma as adjusted... 233,160 -- --
Series B-1 -- 23,019,375 shares
authorized; 23,019,375 shares
issued and outstanding actual; no
shares issued and outstanding pro
forma and pro forma as adjusted... 230,194 -- --
Series B-2 -- 1,800,000 shares
authorized; no shares issued and
outstanding actual, pro forma and
pro forma as adjusted............. -- -- --
Series C -- 18,958,178 shares
authorized; 18,409,629 shares
issued and outstanding actual; no
shares issued and outstanding pro
forma and pro forma as adjusted... 184,096 -- --
Common stock, $.01 par value,
93,300,000 shares authorized;
1,918,978 shares issued and
outstanding actual; 10,974,370
shares issued and outstanding pro
forma; and 15,074,370 shares issued
and outstanding pro forma as
adjusted............................ 19,190 109,744 150,744
Additional paid-in capital........... 79,178,585 84,674,038 133,452,038
Deferred compensation................ (1,405,431) (1,405,431) (1,405,431)
Accumulated deficit.................. (41,038,677) (45,977,234) (45,977,234)
------------ ------------ ------------
Total shareholders' equity......... 37,401,117 37,401,117 86,220,117
------------ ------------ ------------
Total capitalization............. $ 37,413,417 $ 37,413,417 $ 86,232,417
============ ============ ============
19
DILUTION
Our pro forma net tangible book value as of September 30, 1999 was
$20,707,555, or $1.89 per share of common stock. Pro forma net tangible book
value per share represents the amount of total tangible assets less total
liabilities, divided by the number of shares of common stock outstanding after
giving effect to the conversion of all shares of preferred stock. After giving
effect to the sale by us of 4,100,000 shares of common stock offered by this
prospectus at the initial public offering price of $13.00 per share and after
deducting underwriting discounts and commissions and estimated offering
expenses payable by us, our pro forma net tangible book value as of September
30, 1999 would have been approximately $69,526,555, or $4.61 per share. This
represents an immediate increase in pro forma net tangible book value of $2.72
per share to existing stockholders and an immediate dilution of $8.39 per share
to new investors purchasing shares of common stock in this offering. The
following table illustrates this dilution:
Initial public offering price per share.......................... $13.00
Pro forma net tangible book value per share as of September 30,
1999........................................................... $1.89
Increase per share attributable to this offering................ 2.72
-----
Pro forma net tangible book value per share after this offering.. 4.61
------
Net tangible book value dilution per share to new investors in
this offering................................................... $ 8.39
======
The following table summarizes, on a pro forma basis as of September 30,
1999, the total number of shares of common stock purchased from us, the total
consideration paid to us and the average price per share paid to us by existing
stockholders and by new investors purchasing shares in this offering:
Shares Purchased Total Consideration
------------------ -------------------- Average Price
Number Percent Amount Percent Per Share
---------- ------- ------------ ------- -------------
Existing stockholders..... 10,974,370 72.8% $ 78,117,506 59.4% $ 7.12
New investors............. 4,100,000 27.2 53,300,000 40.6 13.00
---------- ---- ------------ ----
Total................... 15,074,370 100% $131,417,506 100%
========== ==== ============ ====
The foregoing tables and calculations are based on shares outstanding on
September 30, 1999 and:
. include 9,055,392 shares of common stock issuable upon the conversion of
all of our outstanding convertible preferred stock outstanding as of
September 30, 1999;
. exclude 1,367,008 shares of common stock issuable upon exercise of all
options outstanding under our 1998 Stock Plan as of September 30, 1999
with a weighted average exercise price of $8.93 per share (132,298 of
which were exercisable as of September 30, 1999); and
. exclude 159,938 shares of common stock issuable upon exercise of all of
our warrants outstanding as of September 30, 1999.
20
SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with the
financial statements and the notes to those statements appearing elsewhere in
this prospectus and the information under "Management's Discussion and Analysis
of Financial Condition and Results of Operations." The statement of operations
data for years ended December 31, 1996, 1997 and 1998, and the balance sheet
data at December 31, 1997 and 1998, are derived from our audited financial
statements appearing elsewhere in this prospectus. Interim results for the
periods ended September 30, 1998 and 1999 are derived from our unaudited
financial statements appearing elsewhere in this prospectus which, in the
opinion of management, reflect all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of that data.
Historical results are not indicative of the results to be expected in the
future.
Year Ended Nine Months Ended
December 31, September 30,
-------------------------------- -------------------------
1996 1997 1998 1998 1999
-------- --------- ----------- ----------- ------------
(unaudited)
Statement of Operations
Data:
Net sales............... $ 21,489 $ 193,064 $ 476,549 $ 371,160 $ 2,589,048
Cost of sales........... 10,681 71,484 417,998 225,423 2,263,738
-------- --------- ----------- ----------- ------------
Gross profit.......... 10,808 121,580 58,551 145,737 325,310
Operating expenses:
Selling and
marketing............ 3,564 98,137 3,001,483 1,593,111 25,296,221
Product development... -- -- 2,135,570 1,360,559 4,454,763
General and
administrative....... 87,925 174,725 1,998,408 1,037,310 5,020,097
-------- --------- ----------- ----------- ------------
Total operating
expenses............. 91,489 272,862 7,135,461 3,990,980 34,771,081
-------- --------- ----------- ----------- ------------
Operating loss.......... (80,681) (151,282) (7,076,910) (3,845,243) (34,445,771)
-------- --------- ----------- ----------- ------------
Interest income
(expense), net......... -- (8,250) 64,481 35,038 659,736
Net loss................ $(80,681) $(159,532) $(7,012,429) $(3,810,205) $(33,786,035)
======== ========= =========== =========== ============
Basic and diluted net
loss per common
share(1)............... $ (0.19) $ (0.25) $ (10.43) $ (5.69) $ (39.89)
======== ========= =========== =========== ============
Shares used to compute
basic and diluted net
loss per common
share(1)............... 430,474 650,607 672,289 669,972 846,953
Pro forma basic and
diluted net loss per
common share(1)(2)..... $ (2.83) $ (4.54)
=========== ============
Shares used to compute
pro forma basic and
diluted net loss per
common share(1)(2)..... 2,479,964 8,523,440
December 31, September 30, 1999
--------------------- ------------------------
Pro Forma as
1997 1998 Actual Adjusted(3)
-------- ----------- ----------- ------------
(unaudited)
Balance Sheet Data:
Cash and cash equivalents...... $ 4,241 $11,243,943 $27,647,394 $76,466,394
Working capital (deficit)...... (65,439) 12,193,907 17,934,634 66,753,634
Total assets................... 90,306 13,461,613 49,834,599 98,653,599
Total long-term debt, net of
current portion............... 74,930 21,091 12,300 12,300
Total convertible preferred
stock......................... -- 463,354 647,450 --
Total shareholders' equity
(deficit)..................... (91,900) 12,579,472 37,401,117 86,220,117
- --------
(1) Please see the financial statements and the notes to those statements
appearing elsewhere in this prospectus for the determination of shares
used in computing basic and diluted net loss per common share and pro
forma basic and diluted net loss per common share.
(2) The pro forma data give effect to the conversion of all of our convertible
preferred stock into 9,055,392 shares of our common stock upon the closing
of this offering.
(3) The pro forma as adjusted data give effect to the conversion of all of our
convertible preferred stock outstanding as of September 30, 1999 into
9,055,392 shares of our common stock upon the closing of this offering and
reflect the sale of 4,100,000 shares of common stock offered by us in this
offering at the initial offering price of $13.00 per share, after
deducting underwriting discounts and commissions and estimated offering
expenses payable by us.
21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of the financial condition and results of operations
of our company should be read in conjunction with the financial statements and
the notes to those statements appearing elsewhere in this prospectus. This
discussion contains forward-looking statements that involve risks and
uncertainties.
Overview
We are an online retail store and information site for vitamins, supplements,
minerals and other natural and healthy living products. By offering
approximately 13,000 products on our site, we provide one-stop shopping for
customers, 24 hours a day, seven days a week. Our online store,
www.MotherNature.com, offers educational and authoritative information, broad
product selection, a high level of customer service, competitive pricing and
easy-to-use navigation and search capabilities.
We were incorporated in the Commonwealth of Pennsylvania in December 1995 as
Mother Nature's General Store, Inc. Our founders worked for approximately three
years to establish distribution channels and an online presence as a retailer
of vitamins, supplements, minerals and other natural and healthy living
products. During that time, we developed and managed our own Web site, built
relationships with many vendors in the vitamins, supplements, minerals and
natural and healthy living products industries, established our private label
line and opened our first distribution and customer service center in
Southampton, Pennsylvania. In early 1998, our founders sought to secure
additional financing to expand our business, promote our brand, invest in
infrastructure and technology improvements, and recruit a seasoned management
team to develop and execute on our business model. These efforts resulted in
the completion of our first round of venture capital financing in June 1998. At
that time we reincorporated in the State of Delaware, changed our name to
MotherNature.com, Inc. and began to recruit our current management team.
Shortly after our new management team joined us, we launched our first major
online banner campaigns, including banner and button purchases on major portals
and shopping areas. In late 1998, we redesigned and launched our Web site,
which included an improved user interface, a more flexible, fully-featured
database structure and enhanced integration of content and merchandise. We have
continued to focus on building our organization, developing our technology
infrastructure, further developing and upgrading our Web site, increasing
customer traffic and sales, expanding our product assortment, promoting our
brand and enhancing our fulfillment and customer service operations. In early
1999, we invested in an aggressive, offline advertising campaign, supplemented
by online advertising, business incentive programs, direct marketing and public
relations.
The success of these efforts has been demonstrated by our growth in quarterly
revenues, which have increased from $105,000 in the fourth quarter of 1998, to
$251,000 in the first quarter of 1999, to $704,000 in the second quarter of
1999, to $1.6 million in the third quarter of 1999. In addition, revenues in
October 1999 were approximately $818,000. In order to manage the increase in
our site traffic and revenues, we have expanded and continue to upgrade our
site, order fulfillment operations and organizational infrastructure. This
expansion to date includes enhancing the features and functions on our site,
adding server and database capacity, building our internally developed order
fulfillment and logistics system, moving our order fulfillment center to a
25,000 square foot facility in Springfield, Massachusetts and adding to our
management and employee team, which totaled 163 employees as of September 30,
1999.
In order to finance our rapid growth, we have raised a total of $61.2 million
in venture capital financing since June 1998 from leading firms, such as
CMG@Ventures, Bessemer Venture Partners and North Castle Partners, which have
expertise in investing in both Internet and healthy living companies. In
addition, during this period we secured subordinated debt and lease financing
for up to $3.3 million, none of which has been drawn down to date.
Despite the growth in our revenues, we continue to incur significant net
losses. Through the first nine months of 1999, we incurred a net loss of
approximately $33.8 million. We have not achieved profitability and
22
expect to incur operating losses for the foreseeable future. We also expect
that the rate at which we incur such losses will increase significantly from
current levels as we continue to incur expenses related to:
. intensifying our brand development;
. expanding our product offerings and Web site content;
. providing promotional benefits to our customers;
. enhancing and upgrading our Web site and our order fulfillment and other
systems;
. expanding our distribution and warehousing facilities;
. developing and renewing strategic relationships; and
. employing additional personnel.
We recognize revenue at the time of shipment. Cash is generally collected in
less than a week as substantially all of our sales are paid for by credit card.
Advertising expenditures are expensed as incurred.
Results of Operations
Nine Months Ended September 30, 1999 Compared to Nine Months Ended September
30, 1998
Net Sales. Net sales consist of product sales to customers net of product
returns, promotional discounts and coupons, and include shipping and handling
charges. Net sales increased 598% to $2.6 million for the nine months ended
September 30, 1999 from $371,000 for the nine months ended September 30, 1998.
This increase was attributable primarily to volume increases, which were a
result of new product lines, the significant growth of our customer base and an
increase in repeat purchases from our existing customers. We believe that the
increase in our customer base was primarily attributable to the implementation
of our offline marketing strategy.
Cost of Sales. Cost of sales consists primarily of the costs of merchandise,
including outbound shipping costs. Cost of sales does not include the cost of
products associated with promotional discounts and coupons used for new
customer purchases, which are included in selling and marketing expense, but
does include shipping costs in connection with such products. Cost of sales
increased 904% to $2.3 million for the nine months ended September 30, 1999
from $225,000 for the nine months ended September 30, 1998. This increase was
attributable primarily to our increased sales volume. Our gross margin
decreased to 13% of net sales for the nine months ended September 30, 1999 from
39% of net sales for the nine months ended September 30, 1998. This decrease
was due to a number of factors, including increased sales discounts and various
price markdowns or "clearance sale" promotions which resulted in lower realized
selling prices. In addition, in late 1998 we experienced malfunctions in our
information system which attributed incorrect selling prices to various
products. These malfunctions, which have since been rectified, resulted in
erroneous lower selling prices and decreased gross margins on such products.
Gross margins are expected to rise in the future as the effect of a smaller
proportion of revenues derived from higher margin private label products is
offset by additional margins from greater volume discounts on product purchases
and direct sourcing of product from manufacturers.
Selling and Marketing Expense. Selling and marketing expense consists
primarily of advertising and promotional expenditures, including the cost of
products associated with promotional discounts and coupons used for new
customer purchases, Web content expenditures, fulfillment facility expenses and
payroll and related expenses for personnel engaged in marketing, content, order
fulfillment and customer service operations. Selling and marketing expenses
increased to $25.3 million for the nine months ended September 30, 1999 from
$1.6 million for the nine months ended September 30, 1998. This increase was
attributable primarily to expenditures related to our offline and online
advertising and promotional strategy, and product expenditures related to
promotional discounts offered to attract new customers. These amounts were
$20.9 million for the nine months ended September 30, 1999 compared to $961,000
for the nine months ended September 30, 1998.
23
Since September 30, 1998, we hired 90 employees engaged in marketing, content,
order fulfillment and customer service operations, including a Chief Marketing
Officer and directors and managers for Business Development, Customer Service
and Fulfillment. We will incur a non-cash charge of approximately $543,000 per
month for the next 12 months relating to the amortization of intangible assets
acquired from Rodale. Thereafter, the non-cash charge per month relating to
such amortization will decline over the ten year term of the agreement. We
intend to continue to pursue an aggressive branding and marketing campaign and,
therefore, we expect selling and marketing expenses to increase significantly
in future periods.
Product Development Expense. Product development expense consists primarily
of payroll and related expenses for merchandising, Web site development, Web
design and information technology personnel and related infrastructure. Product
development expenses increased to $4.5 million for the nine months ended
September 30, 1999 from $1.4 million for the nine months ended September 30,
1998. This increase was attributable primarily to an increase of 44 employees
engaged in product development activities since September 30, 1998 and
associated costs related to enhancing the features, design and functionality of
our online store and increasing the capacity of our transaction-processing
systems. We believe that continued investment in product development is
critical to attaining our strategic objectives and, therefore, we expect
product development expense to increase significantly in future periods.
General and Administrative Expense. General and administrative expense
consists of payroll and related expenses for executive and administrative
personnel, recruiting, professional fees and other general corporate expenses.
General and administrative expenses increased to $5.0 million for the nine
months ended September 30, 1999 from $1.0 million for the nine months ended
September 30, 1998. This increase was attributable primarily to increased
company headcount of 141 employees since September 30, 1998, compensation
expense of approximately $504,000 related to employee stock options and related
expense associated with additional personnel. We believe general and
administrative expenses will increase as we expect to incur additional costs
related to the growth of our business. We will incur an additional compensation
expense of approximately $1.4 million related to employee stock options as they
continue to vest through April 2003.
Interest Income (Expense). Interest income (expense), net consists of income
earned on our cash balances in money market accounts partially offset by
expenses attributable to capital lease obligations, commitment fees, warrant
financing and original issue discount related to notes payable. Interest income
(expense) increased to $660,000 for the nine months ended September 30, 1999
from $35,000 for the nine months ended September 30, 1998. This increase was
attributable primarily to earnings on higher average cash and cash equivalent
balances during the first nine months of 1999.
Provision for Income Taxes. We have had net operating losses for every period
through September 30, 1999. We may not be able to utilize all or any of these
tax loss carry-forwards as a result of this offering and prior financings. We
have not recognized a provision for income taxes due to the uncertainty
surrounding the realization of the favorable tax attributes in future tax
returns and we have placed a valuation allowance against our net deferred tax
assets.
Net Loss. As a result of the foregoing factors, we incurred a net loss of
$33.8 million for the nine months ended September 30, 1999 as compared to $3.8
million for the nine months ended September 30, 1998.
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Net Sales. Net sales increased 147% to $477,000 in fiscal 1998 from $193,000
in fiscal 1997. This increase was attributable primarily to volume increases
which were a result of both the significant growth in our customer base and
repeat purchases from existing customers.
Cost of Sales. Cost of sales increased 485% to $418,000 in fiscal 1998 from
$71,000 in fiscal 1997. This increase was attributable primarily to our
increased sales volume and a shift in our product mix toward lower
24
margin products. In the fourth quarter of 1998, we recorded a charge of
approximately $73,000 related to our reserve for obsolete and slow-moving
inventory items. As a result of these factors and the malfunctions of our
information system, whereby lower prices were charged in error, our gross
margin decreased to 12% of net sales in fiscal 1998 from 63% of net sales in
fiscal 1997.
Selling and Marketing Expense. Selling and marketing expense increased to
$3.0 million in fiscal 1998 from $98,000 in fiscal 1997. This increase was
attributable primarily to $1.9 million incurred in 1998 for online advertising
and an increase in staffing and associated costs, as we hired our Vice
President, Brand Marketing and directors of distribution and online marketing,
as well as several other employees needed to implement our marketing strategy.
Product Development Expense. Product development expense increased to $2.1
million in fiscal 1998 from $0 in fiscal 1997. This increase was attributable
primarily to $830,000 incurred for professional consulting services, $750,000
for the purchase of a developed natural products database and Web site and an
increase in staffing and associated costs, as we hired our Chief Technology
Officer, Executive Producer and directors and managers of content and
technology.
General and Administrative Expense. General and administrative expense
increased to $2.0 million in fiscal 1998 from $175,000 in fiscal 1997. This
increase was attributable primarily to expenditures incurred related to the
growth of our business, including recruiting and professional fees as well as
an increase in staffing and associated costs, as we hired our Chief Executive
Officer and Chief Financial Officer, and an increase in compensation expense of
approximately $402,000 related to employee stock options.
Interest Income (Expense). Interest income (expense), net increased to
$64,000 in fiscal 1998 from ($8,000) in fiscal 1997. This increase was
attributable primarily to interest income on higher average cash and cash
equivalent balances during fiscal 1998.
Net Loss. As a result of the foregoing factors, we incurred a net loss of
$7.0 million in fiscal 1998 as compared to $160,000 in fiscal 1997.
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
Net Sales. Net sales increased 798% to $193,000 in fiscal 1997 from $21,000
in fiscal 1996. This increase was attributable to volume increases as a result
of the significant growth in our customer base.
Cost of Sales. Cost of sales increased 569% to $71,000 in fiscal 1997 from
$11,000 in fiscal 1996. This increase was attributable primarily to an increase
in sales volume. Our gross profit increased from $11,000 in fiscal 1996 to
$122,000 in fiscal 1997 primarily as a result of our growth in revenues. As a
result, our gross margin increased to 63% of net sales in fiscal 1997 from 50%
of net sales in fiscal 1996.
Selling and Marketing Expense. Selling and marketing expense increased to
$98,000 in fiscal 1997 from $4,000 in fiscal 1996. This increase was
attributable primarily to our increased sales volume.
General and Administrative Expense. General and administrative expense
increased to $175,000 in fiscal 1997 from $88,000 in fiscal 1996. This increase
was attributable primarily to the growth of our business and an increase in
staffing.
Interest Income (Expense). Interest income (expense), net increased to
$(8,000) in fiscal 1997 from $0 in fiscal 1996. This increase in interest
expense was attributable primarily to original issue discount related to a loan
entered into in 1997.
Net Loss. As a result of the foregoing factors, we incurred a net loss of
$160,000 in fiscal 1997 as compared to $81,000 in fiscal 1996.
25
Liquidity and Capital Resources
From inception until June 1998, we financed our operations through a
combination of loans and equity investments aggregating approximately $208,000.
Since June 1998, we have financed our operations primarily through private
sales of convertible preferred stock. Through September 30, 1999, these private
equity financings totaled $61.2 million.
Net cash used in operating activities was $24.0 million for the nine months
ended September 30, 1999 as compared to $3.2 million for the nine months ended
September 30, 1998. This increase in cash used in operating activities was
attributable primarily to a $30.0 million increase in net loss, an increase in
inventories, prepaid expenses, intangible assets and other assets, offset in
part by increases in accounts payable, accrued expenses, accrued compensation
and depreciation and amortization. Net cash used in operating activities was
$5.0 million in fiscal 1998, as compared to $80,000 in fiscal 1997 and $3,000
in fiscal 1996. In each of these periods our principal operating cash
requirements were to fund our net loss, offset in part by increases in accrued
expenses. The significant increase in working capital in fiscal 1998 was due
primarily to significant growth in our operations.
Net cash used in investing activities was $2.3 million for the nine months
ended September 30, 1999 as compared to $281,000 for the nine months ended
September 30, 1998. Net cash used in investing activities was $1.2 million in
fiscal 1998, as compared to $28,000 in fiscal 1997 and $5,500 in fiscal 1996.
The increase was attributable primarily to purchases of property and equipment.
In each period, net cash used in investing activities consisted primarily of
purchases of property and equipment.
Net cash provided by financing activities was $42.6 million for the nine
months ended September 30, 1999 as compared to $7.2 million for the nine months
ended September 30, 1998. In the first nine months of 1999, we received $43.6
million from the issuance of convertible preferred stock. Net cash provided by
financing activities was $17.4 million in fiscal 1998, as compared to $111,000
in fiscal 1997 and $9,000 in fiscal 1996. Net cash provided by financing
activities for fiscal 1998 consisted primarily of proceeds of $17.5 million
from the issuance of convertible preferred stock. In fiscal 1997, net cash
provided by financing activities consisted primarily of proceeds of $89,000
from stockholder advances and notes payable and $25,000 in connection with the
issuance of common stock. In fiscal 1996, net cash provided by financing
consisted primarily of proceeds from stockholder advances.
As of September 30, 1999, we had $27.6 million of cash and cash equivalents.
As of that date, our principal commitments consisted of obligations outstanding
under capital leases in the amount of $1,700 and media purchase commitments of
$11.8 million. Although we currently have no material commitments for capital
expenditures, we anticipate that our business model will require us to commit
resources to promote our brand aggressively, expand our product and service
offerings, and enhance our infrastructure. Our media purchases generally
require a one to three month advance commitment, though some of these
commitments may be resaleable. In order to take advantage of discounts and
favorable placements associated with advance media purchases, we may establish
a short-term credit facility with a lender prior to the closing of this
offering. We do not currently anticipate that borrowings under such a facility
would exceed $3.0 million.
Upon completion of our initial public offering, the series C preferred
stockholders will receive 379,889 additional shares of common stock that will
be issued as an inducement to convert their shares at the consummation of the
offering. The value of these shares, approximately $4.9 million based upon the
initial public offering price of $13.00 per share, will be treated similarly to
a special dividend to the preferred stockholders and accounted for within
equity through the accumulated deficit and additional paid-in capital accounts.
Unaudited pro forma stockholders' equity reflects the assumed conversion of the
convertible preferred stock, and the inducement to convert increased the
Company's pro forma loss per share by $0.39 per share, from $(4.15) to $(4.54)
per share.
We currently anticipate that the net proceeds of this offering, together with
current cash and cash equivalents, will be sufficient to meet our anticipated
needs for working capital and capital expenditures through at least the next 12
months. We anticipate that we are likely to need additional financing to
execute our
26
business model after that 12-month period or sooner if we need to respond to
business contingencies, such as funding additional advertising expenditures,
developing new or enhancing existing content, features or services, enhancing
our operating infrastructure, responding to competitive pressures, or acquiring
complementary businesses or technologies. If we raise additional funds through
the issuance of equity, or convertible debt securities, the percentage
ownership of our stockholders will be reduced, and these newly-issued
securities may have rights, preferences or privileges senior to those of
existing stockholders, including those acquiring shares in this offering. We
cannot be certain that additional financing will be available to us on
favorable terms when required, or at all.
Year 2000 Readiness Disclosure
Many existing computer programs use only two digits to identify a year. These
programs were designed and developed without addressing the impact of the
upcoming change in the century. If not corrected, many computer software
applications could fail or create erroneous results by, at or beyond the year
2000. We use software, computer technology and other services internally
developed and provided by third-party vendors that may fail due to the year
2000 phenomenon. For example, we are dependent on the financial institutions
involved in processing our customers' credit card payments for product orders
and on a third party that hosts our servers. We are also dependent on
telecommunications vendors to maintain our network and the United States Postal
Service and other third-party carriers to deliver orders to customers.
We have reviewed the year 2000 compliance of our internally developed
proprietary software. Since our inception, we have internally developed
substantially all of the systems for the operation of our Web site. These
systems include our online search and navigation capabilities, customer service
and transaction-processing and fulfillment functions, as well as firewall,
security, monitoring and back-up capabilities. Based upon our assessment to
date, we believe that our internally developed proprietary software is year
2000 compliant.
We are currently assessing the year 2000 readiness of our third-party
supplied software, computer technology and other services of our vendors. Based
upon the results of this assessment, we will develop and implement, if
necessary, a remediation plan with respect to third-party software, third-party
vendors and computer technology and services that may fail to be year 2000
compliant. At this time, the expenses associated with this assessment and
potential remediation plan are expected to be insignificant. The failure of our
software and computer systems and of our third-party suppliers to be year 2000
compliant could require us to incur significant unanticipated expenses.
The year 2000 readiness of the general infrastructure necessary to support
our operations is difficult to assess. For instance, we depend on the integrity
and stability of the Internet and NaviSite, Inc., our Web site hosting service,
to provide our services. We also depend on the year 2000 compliance of the
computer systems and financial services used by consumers. A significant
disruption in the ability of consumers to reliably access the Internet or
portions of it or to use their credit cards would decrease the demand for our
services and could result in a decline in sales.
We have not incurred any costs to date to address the year 2000 phenomenon
since our systems were initially designed and built with year 2000 readiness in
mind. At this time, we have not yet developed a formal contingency plan to
address situations that may result if our vendors are unable to achieve year
2000 compliance because we currently do not believe that such a plan is
necessary. The cost of developing and implementing such a plan, if necessary,
could be material. Any failure of our systems, our vendors' systems or the
Internet to be year 2000 compliant could have material adverse consequences for
us. Those consequences could include difficulties in operating our Web site
effectively, taking product orders, making product deliveries or conducting
other fundamental parts of our business, such as operating our internal
accounting database and security systems.
27
Recent Accounting Pronouncements
In March 1998, the American Institute of Certified Public Accountants (AICPA)
issued Statement of Position (SOP) 98-1, Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use, requiring computer software
costs associated with internal-use software to be expensed as incurred until
certain capitalization criteria are met. We adopted SOP 98-1 for the year ended
December 31, 1998. Adoption of this statement did not have a material impact on
our financial position or results of operations.
In April 1998, the AICPA issued SOP 98-5, Reporting on Costs of Start-Up
Activities, requiring all costs associated with preopening, preoperating and
organization activities to be expensed as incurred. We have adopted the
statement for the year ended December 31, 1998 and have expensed all costs of
start-up activities.
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities (SFAS 133). SFAS 133 establishes accounting
and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts (collectively referred to as
derivatives), and for hedging activities. As issued, SFAS 133 is effective for
all fiscal quarters of all fiscal years beginning after June 15, 1999, with
earlier application encouraged. In May 1999, the FASB delayed the effective
date of SFAS 133 for one year, to fiscal years beginning after June 15, 2000.
We do not currently nor do we intend in the future to issue derivative
instruments and therefore do not expect that the adoption of SFAS 133 will have
any impact on our financial position or results of operations.
28
BUSINESS
Overview
We are an online retail store and information source for vitamins,
supplements, minerals and other natural and healthy living products. Through
our innovative combination of content and commerce, we intend to establish
MotherNature.com as the preferred destination for consumers interested in
natural and healthy living products. We currently offer approximately 13,000
products on our site and can special order additional products through our
supplier relationships. We continue to increase our product assortment. In
addition, we provide educational and authoritative news and information about
our products and healthy living in general, which we integrate with our product
offerings in an easily accessible way. We are building the MotherNature.com
brand and increasing our customer base through an aggressive mass-media
advertising program that promotes our memorable name. Through these marketing
efforts, we are seeking to establish MotherNature.com as a trusted advisor to
our growing online community, which includes approximately 136,000 registered
members as of September 30, 1999.
Industry Background
Growth of the Internet and Electronic Commerce
The Internet has become an increasingly significant medium for communication,
information and commerce. According to International Data Corporation (IDC),
there were approximately 142 million Internet users worldwide at the end of
1998, and this number is expected to grow to approximately 398 million users by
the end of 2002. The total value of services and products purchased over the
Internet grew from approximately $296 million at the end of 1995 to
approximately $50 billion at the end of 1998, according to IDC. IDC estimates
that this amount will increase to approximately $733 billion by the end of
2002. According to IDC, worldwide business-to-consumer sales over the Internet
are expected to increase from approximately $15 billion in 1998 to
approximately $116 billion by 2002. We believe that this dramatic growth
presents significant opportunities for online retailers.
The Vitamins, Supplements, Minerals and Natural Products Market
According to Packaged Facts, a consumer products market research firm, sales
of vitamins, supplements and minerals totaled approximately $8.9 billion in
1998 and are expected to grow to approximately $16.6 billion by 2003, a
compound annual growth rate of 13.3%. We believe that several factors are
driving this growth, including a rapidly growing segment of the population that
is concerned with aging and disease, a growing interest in preventative health
care, favorable consumer attitudes toward natural products and a favorable
regulatory statute, the Dietary Supplement Health and Education Act of 1994.
Additionally, public awareness of the positive effects of vitamins and other
nutritional supplements on health has been heightened by widely publicized
reports of favorable research findings. According to data published by Packaged
Facts, 56% of U.S. adults took vitamins in 1998, up from 43% in 1993. We
believe, based upon this data, that 78% of these adults now take vitamins at
least once a day.
The vitamins, supplements and minerals market is a subset of the broader
natural products market, which includes product categories such as personal
care products, household and other general merchandise, perishable and non-
perishable foods, organic coffees and teas, sports nutrition, cosmetics, baby
care products and pet care products. Due to the size of this market and the
absence of a dominant online natural products retailer, we believe that
additional opportunities for online sales within the broader natural products
market also exist.
29
Limitations of Traditional Retailers of Vitamins, Supplements, Minerals and
Natural Products
We believe that traditional retailers of vitamins, supplements, minerals and
other natural and healthy living products face several challenges in providing
a satisfying shopping experience for consumers, including:
. Lack of information and product guidance. The typical retail shopping
experience can be confusing and often lacks timely, relevant and
credible information to educate and guide the consumer to an effective
product solution. In particular, retail stores offer consumers limited
means to choose among many products or to select the appropriate product
for a given condition other than by asking store personnel who may not
be knowledgeable. Further, researching a product or health condition in
a retail store can be difficult due to the lack of easily accessible
reference materials.
. Lack of convenience and privacy. Traditional retailers have limited
store hours and locations. Traditional retailers are also unable to
provide consumers with privacy while shopping, as consumers must often
reveal personal health conditions when asking store personnel for
product advice.
. Limited product assortment. The capital and real estate intensive nature
of store-based retailers limit the product selection that can be
economically offered in each store location.
. Lack of customer information and communication. Traditional retailers
cannot easily obtain demographic information about their customers,
which prevents them from customizing product presentation and selection
and undertaking focused direct marketing activities. Traditional
retailers often have little interaction with their customers and most
are unable to establish ongoing communication with them.
As a result of the foregoing limitations, we believe there is significant
unmet demand for an alternative shopping channel that can provide consumers of
vitamins, supplements, minerals and other natural and healthy living products
with a broad array of products, a wealth of news and information to help them
research and select products and a convenient and private shopping experience.
The MotherNature.com Solution
We attract and retain consumers through the following key attributes of our
site:
Educational and Authoritative Information. Our online store is designed to
inform consumers and assist them in making appropriate, educated purchase
decisions. Through our Healthy Living Library, our users can access timely and
authoritative literature on all aspects of healthy living, including over 3,000
articles, news clips, excerpts from Rodale books and encyclopedia entries from
the Encyclopedia of Natural Health included on our site, as well as narratives
on health conditions, natural remedies, products and recent developments. Our
site offers a wealth of internally developed and third-party licensed content
developed by physicians, nutritionists and other health professionals. The
content on our site is based on research and studies published in prominent
medical journals, such as the Journal of the American Medical Association, the
Lancet and the New England Journal of Medicine, as well as news articles and
various other books and periodicals. Through our recent alliance with Rodale,
we have the right to offer the contents of over 150 healthy living books and
certain columns from Prevention magazine.
Integration of Content and Commerce. Our site integrates information on
healthy living and specific health conditions with access to products, and
thereby provides comprehensive solutions to consumer concerns. Consumers can
use our content to search for and research specific products or brands or to
locate products targeted to their particular lifestyle or special interest.
Alternatively, consumers can research and shop for a specific health concern by
browsing our Healthy Living Library, which includes the Encyclopedia of Natural
Health, or the library of Rodale books and selecting from natural solutions
merchandised through links to the content. For example, under a discussion of
"depression," consumers are presented with a targeted selection of natural
products, including "St. John's Wort," with a "click to buy" option. The
consumer also has the option of selecting from a set of our product
recommendations, called "solution baskets," which we have created to address
particular health concerns.
30
Convenient and Private Shopping. Our Web site is easily accessible for
shopping 24 hours a day, seven days a week. Consumers shop in the privacy of
their home, or office, and can comfortably research sensitive health concerns
and purchase products that they might be uncomfortable purchasing in a retail
store. We offer consumers four easy ways to shop our site: by Department, by
Ailment, by Brand and by Gender/Age. Consumers can also shop for a particular
product by using our Products A to Z index. Our Web site also provides a number
of features which make the shopping process more convenient. For example, we
have simplified the reordering process by enabling customers to select their
past orders for reorder with one click. In addition, we provide each customer
with a personal shopping list of every product the customer has previously
ordered, which allows quick and easy selection of specific items for reorder.
We also offer a personal shopper service in which a customer service
representative finds desired products and information for those customers that
complete an online request form.
Broad Expandable Product Assortment. Our product selection is substantially
larger than that offered by store-based retailers. We offer approximately
13,000 vitamins, supplements, minerals and other natural and healthy living
products on our site, and provide customers with the ability to order
additional products through our suppliers. Our online store is easily
expandable to include additional natural and healthy living products and
related services we may add in the future. Our current product offerings
include such categories as: Vitamins, Herbs & More; Diet & Fitness; Natural
Therapies; Aromatherapy & Candles; Bath & Body; Books & Entertainment; Home &
Fashion; Nature's Grocery; and Pet Products. We organize our broad product
assortment by allowing consumers to search by brand, product, health concern,
lifestyle or special interest or product category.
Customer Information and Ongoing Communication. We use e-mail to provide
order status and shipping confirmation, to inform customers of news stories
which relate to their particular past purchases and to respond to customer
service inquiries. In addition, we use e-mail to send our customers a bi-weekly
newsletter which is also made available on our Web site. Through the member
registration process we can determine the demographics of our customer base and
can use this information to customize our Web site and product and service
offerings, thereby enabling us to better address certain demographic segments
of our customer base.
The MotherNature.com solution also includes quality customer service, rapid
product delivery and e-mail order confirmation. Through our warehouse and
distribution center, we can manage inventory levels based on customer demand
and indicate on our site which products are in stock. In addition, we are
developing the MotherNature.com community to provide consumers with a forum for
sharing natural and healthy living product experiences, ideas and advice.
Our Strategy
We intend to establish MotherNature.com as the leading online retailer and
information site for vitamins, supplements, minerals and other natural and
healthy living products. Our strategy for growing our business includes the
following:
Promote the MotherNature.com Brand. We intend to promote our highly memorable
brand name through the aggressive use of traditional offline advertising, the
promotion of our private label products and the selective use of online
advertising, direct marketing and public relations. In particular, we believe
our offline advertising campaign has been and will continue to be successful in
rapidly building awareness of our brand in the geographic markets we target. We
recently broadened this advertising campaign from radio, newspaper, magazine
and outdoor media to include a national television campaign, which we commenced
in late August 1999.
Establish MotherNature.com as the Trusted Authority for Vitamins,
Supplements, Minerals and Other Natural and Healthy Living Products. Through
our marketing efforts, we intend to establish our Web site as a
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trusted consumer resource by providing informative and authoritative content
that will differentiate our Web site from those of our competitors. We believe
the content on our site, including the Encyclopedia of Natural Health, the
numerous articles and news clips from leading sources, the library of Rodale
books, and the authoritative contributions of our staff of health
professionals, provides consumers with trustworthy information to conduct
thorough research on hundreds of health conditions and vitamins, supplements,
minerals and other natural and healthy living products. We have established a
Medical Advisory Board comprised of health professionals, including:
. Lee Lipsenthal, M.D., an internist;
. Professor Edmund R. Burke, Ph.D., an exercise physiologist;
. Stephen T. Sinatra, M.D., F.A.C.C., a cardiologist;
. Nicholas V. Perricone, M.D., a dermatologist;
. Robert J. Barry, Ph.D., a biochemist;
. Dr. Tori Hudson, N.D., a naturopathic physician; and
. Robert A. Ronzio, Ph.D., C.N.S., F.A.I.C., a scientist.
Members of our Medical Advisory Board are responsible for making individual
content contributions and for providing our editorial staff with guidance on
developing and reviewing content as requested. We intend to further develop our
community and establish trust with consumers by providing question and answer
sessions with members of our Medical Advisory Board.
Promote Repeat and Complementary Purchases. We intend to capitalize on the
inherent need for regular replenishment of vitamins, supplements and minerals
by promoting repeat sales through features including automatic reorder,
personalized nutritional supplement programs, customer profiling, loyalty
programs and targeted news feeds. We also plan to introduce impulse items at
checkout, first with standard products and later with highly targeted items
based on the contents of the consumer's shopping basket. As we offer a broader
range of natural products, we intend to provide consumers with natural
alternatives to frequently used products such as household detergents, pet
foods and cosmetics.
Develop Business Incentive Programs. We intend to enlist and provide
financial incentives for primary care physicians, alternative health providers,
corporate health plans, HMOs and physician networks, wellness centers and
health clubs to generate additional revenue opportunities by referring their
clients to our Web site. We believe that our relationships with these
businesses and individuals will increase consumer traffic to our site, provide
some additional content as well as provide additional sources of content and
enhance the credibility of our site.
Provide Quality Customer Service. We intend to provide our customers with a
high level of service, primarily through our in-house distribution center. We
are increasing inventory levels of popular products and have moved to a new
25,000 square foot order fulfillment facility, located adjacent to a U.S.
Postal Service Priority Mail processing center, that has expanded our
warehousing and rapid distribution capacity. We believe that our control over
our distribution center will enable us to fill customer orders more promptly
and maintain higher customer satisfaction levels. We also endeavor to provide
quality customer service through e-mail communications and our responsive call
center.
Expand Presence in International Markets. We believe that there are
significant opportunities in the vitamins, supplements, minerals and other
natural and healthy living products markets internationally, particularly in
Asia, the United Kingdom and Canada. As an online retailer, we believe that we
will be able to effectively penetrate and serve these international markets. We
intend to expand our international sales by translating our Web site into
several foreign languages and advertising in those strategically selected areas
where we believe a substantial market may exist or by developing strategic
partnerships with other entities to serve these areas.
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Our Site
Shopping Our Store
From the MotherNature.com home page, consumers can shop in four ways:
. By Department. Consumers can search for products among the 9 product
departments on our Web site, such as Vitamins, Herbs & More, Natural
Therapies, Pet Products and Books & Entertainment.
. By Gender/Age. Consumers can search for products and read articles
specific to their gender or age among four main categories: Men, Women,
Children and Seniors.
. By Ailment. Consumers can search for products related to over 100 health
concerns included in the Concerns From A-Z category.
. By Brand. Consumers can search for their favorite brand and can browse
the various categories of products which are provided for each listed
brand.
In addition, consumers can search for their favorite product in the Products
A to Z Index. We also alert consumers to special values, new products, product
promotions and new merchandise categories. For example, consumers can easily
locate product specials on our "On Sale Now" page and new product offerings on
our "What's New" page. Also, our home page features our best-selling products
and promotes various "Featured Specials."
Our Web site offers several personalized services. We provide our members
with a free bi-weekly e-mail newsletter containing timely news stories and
articles, as well as product specials which are designed to encourage customer
purchases. In addition, customers can choose to receive free direct e-mail news
clippings on over 40 health topics.
Our site offers consumers an easy and convenient shopping experience.
Consumers simply click on a button to add products to their virtual shopping
baskets. As they browse, consumers can add and subtract products from their
shopping baskets prior to making a final purchase decision. We deduct
promotional dollars from the purchase price of products, eliminating the need
to cut coupons. Customers who shop using our personal shopper feature are sent
an e-mail when their basket has been filled by one of our customer service
representatives, leaving them one click away from purchasing. To submit orders,
customers click on the "Proceed to Check Out" button and are prompted to supply
shipping and credit card details online, or by e-mail, phone or facsimile. A
variety of shipping options are offered and large orders receive shipping
discounts. Customers are provided with automated e-mail order verification,
back-order processing and shipping confirmation. Upon their first order, every
MotherNature.com customer is assigned a password-accessible personal account
number. This "Your Account" function allows customers to easily view current
order status and previous order contents and to select past orders for one-
click reorders.
Our Content
Our site offers a wealth of authoritative and educational content. We believe
that our integration of content and commerce results in a more rewarding
shopping experience for consumers. We have established a Healthy Living Library
on our site that includes content from Rodale books as well as over 3,000
articles, news clips and encyclopedia entries from the Encyclopedia of Natural
Health, and narratives on health conditions, natural remedies, products and
recent developments, all of which are designed to provide credible information
and assist consumers with their purchase decisions. This information will be
supplemented as we continue to add content from Rodale books and columns from
Prevention as part of our searchable online library. A key component of our
merchandising strategy is our ability to link relevant product offerings
throughout the text of the various articles, encyclopedia entries and other
narratives displayed on our Web site.
33
This strategy enables us to more effectively market our products, since
consumers are able to research a specific health concern and at the same time
access the natural product solutions mentioned within the content. Our "News &
Views" section alerts consumers to timely news stories regarding vitamins,
supplements, minerals and other healthy living issues, while enabling us to
highlight applicable product offerings.
The Encyclopedia of Natural Health is based on content licensed from
Healthnotes, Inc. and incorporates information gathered from over 500
authoritative scientific and medical journals, such as The Journal of the
American Medical Association, the Lancet and the New England Journal of
Medicine. The Encyclopedia home page displays six main categories of
encyclopedia entries, thereby enabling consumers to easily search its contents.
For example, under the "Health Concerns" category, the entries address over 125
health concerns and helpful dietary supplements. Under the "Herbs & Botanicals"
category, a consumer can find reviews covering 150 herbs, which include
information on where the herbs are grown and their historical or traditional
uses.
In addition, our site includes internally developed content, such as our
"Consumer Guides," our bi-weekly newsletter and a section devoted to recent
news stories, as well as content licensed from third parties, such as the
American Botanical Council. Members of our Medical Advisory Board write
articles, columns and narratives for inclusion on our site, review and critique
selected portions of our content, provide advice and guidance to our editorial
staff and assist in developing our solution baskets. Medical Advisory Board
members also assist us in preparing articles on new product or market
developments, including responses to current media publicity regarding
vitamins, supplements and minerals.
We have incorporated a number of books from Rodale's collection of books on
vitamins, supplements, minerals, natural healing, alternative medicine, home
health and cooking as well as the "Supplement News" and "Alternative Medicine
News" columns from recent issues of Prevention magazine as part of a topic
sensitive, cross-indexed central library on our site. Consumers are able to
search for information on specific topics and can link to relevant excerpts or
entire text entries from Rodale books. Our site already includes the complete
text of several of Rodale's best selling titles, including "Herbs for Health &
Healing" and "Prevention's Healing with Vitamins," and more titles are expected
to be added to the library. During the ten-year term of our agreement with
Rodale, we will be able to include future books or chapters on vitamins,
supplements, minerals, natural healing, alternative medicine, home health and
cooking as part of our online library.
Our Community
We are building an active community dedicated to educating consumers about
vitamins, supplements, minerals, healthy living and natural products. We are
also developing interactive tools for the site in order to provide a fulfilling
shopping experience and to build a sense of community among our customers. We
currently provide direct e-mail news clippings and several community message
boards, including boards on herbs, weight control, natural pet care, sports
nutrition and women's health, which are monitored by qualified professionals
and which enable consumers to ask and respond to each other's questions. We
recently added an "Ask Our Experts" section to enable consumers to ask
questions of our Medical Advisory Board members and have included sections
devoted to health quizzes and astrology. Future plans include the introduction
of additional message boards, live advice forums hosted by members of our
Medical Advisory Board and special guests and customer testimonials.
Marketing and Site Promotion
Our marketing strategy is designed to strengthen the MotherNature.com brand
name, increase traffic to the MotherNature.com store, build strong customer
loyalty, maximize repeat purchases and develop incremental revenue
opportunities. We believe our offline advertising campaign, launched in March
1999, has proven to be especially successful in achieving these objectives.
Therefore, we intend to continue to promote the MotherNature.com brand through
aggressive offline advertising as well as through online advertising, business
incentive programs, direct marketing and public relations. Our marketing
efforts are targeted at active, health- conscious adults and consist of:
Offline advertising. We are committing significant resources to building our
brand name by using print, radio and outdoor advertising campaigns. To assist
us in developing our offline advertising campaigns, we have
34
retained Ogilvy & Mather Worldwide as our agency of record for both creative
and media planning and buying. Our first major offline campaign commenced in
early March 1999 and was primarily targeted at the metropolitan areas of
Boston, New York City, San Francisco and Seattle. In May and June, the campaign
was expanded to include several additional cities, including Los Angeles,
Detroit, Dallas, Denver, Chicago, Washington D.C., Houston, Philadelphia and
Phoenix, representing over 30% of the United States' population. This campaign
was intended to increase consumer awareness of our Web site and was comprised
of radio advertisements, print advertisements in newspapers, including The New
York Times, The Boston Globe and The San Francisco Chronicle, regional editions
of national magazines, such as People Magazine, and outdoor media such as
billboards. Targeted ads were also placed in natural products and health-
related magazines and relevant sections of national newspapers. The radio
advertisements featured recognized and celebrity voices, including the voice of
actress Blythe Danner as "Mother Nature."
In late August 1999, we unveiled our second offline campaign, a major
national brand-building campaign that includes television commercials as well
as radio and print advertisements. This campaign seeks to build on our brand
awareness and establish us as a trustworthy information source and online
retailer. The radio and television advertisements feature a Mother Nature
character as a spokesperson for us. The television commercials have aired
during major events such as Major League Baseball playoff games, the U.S.
Tennis Open, the Ryder Cup and the Emmy Awards as well as other highly rated
programs that reach our target market.
Other advertising. We are using online advertising, direct marketing and
public relations in our marketing strategy. Our online strategy involves
selective advertising on the Web sites of major Internet content and service
providers and targeted health-related Web sites. We have established hypertext
links on sites including Yahoo! and America Online Shopping Channels. In
addition, we have established an affiliates program which allows third parties
to receive commissions for sales generated by customers that hyperlink to
MotherNature.com from the third-party site.
We will continue to refine our direct marketing campaign by tailoring
offerings to the demographics of our targeted audience. Currently, our direct
marketing activities consist of our bi-weekly newsletter, e-mail and regular
mail postcards, and special inducements. In the future, we will direct market
to Rodale's expansive database of more than 25 million customers who have
demonstrated their interest in healthy living.
We have engaged a public relations firm to generate media interest in our
site through editorial coverage in business, consumer and industry trade
publications. Our first public relations event, "Stress Relief for a Taxing
Day," was held on April 15, 1999 in Boston, New York, San Francisco and
Seattle, where we handed out samples of our private label Kava Kava, a natural
stress reliever, to persons mailing their income tax returns.
Our latest public relations initiative is our national health education
campaign entitled "Live Better." The campaign will address health related
topics, provide information on how to maintain good health and consist of
seminar presentations, interactive chats on our Web site and the creation and
publication of various brochures. We have engaged Gayle Reichler, M.S., R.D.,
C.D.N. to act as a spokesperson for the campaign. The first stage of the
campaign will center around our recently published brochure, Live Better: A
Guide for Women, which Ms. Reichler will discuss in an online chat with
consumers on our site later this Fall. Ms. Reichler received a Masters degree
in Food and Nutrition from New York University and has appeared on several
television shows, including the Weekend Today Show, CBS News, The View with
Barbara Walters and the Food Network, as well as in national newspapers and
magazines, including The New York Times, Fitness and Women's Day.
Business incentive programs. We believe we can increase traffic to our site
and acquire loyal customers through the establishment of business incentive
programs. We intend to enlist and provide financial incentives for primary care
physicians, alternative health providers, corporate health plans, HMOs and
physician networks, wellness centers and health clubs to generate additional
revenue opportunities through the promotion of VSM and other natural and
healthy living product purchases and referrals to our Web site. We believe that
our relationships with these businesses and individuals will increase consumer
traffic to our site, as well as provide additional sources of content and
enhance the credibility of our site.
35
Consistent with our strategy of developing business incentive programs, we
have recently entered into an alliance with Landmark Healthcare, Inc., a
national health care company that provides alternative medicine programs and
related services to health insurance companies, health maintenance
organizations, corporations and individuals. This relationship contemplates
that, commencing in January 2000, Landmark will offer its members the
opportunity to participate in a new Landmark nutritional supplement program,
which will consist of co-branded, customized Web sites that we will design,
develop and host for Landmark and significant Landmark clients. Landmark will
promote these customized sites which will display content and offer for sale
products that we make available on our own Web site; and Landmark, its
corporate clients and their individual members will share in additional
discounts on purchases of our products. At the end of each quarter during the
term of the Agreement, we have agreed to pay Landmark a cash fee or,
alternatively, issue three-year warrants to purchase our common stock, all
based upon the number of new members and referring practitioners who
participate in the joint program. Over the term of the agreement, the aggregate
cash performance fees payable to Landmark will not exceed $6,000,000 or,
alternatively, the number of shares underlying warrants issuable will not
exceed 160,794 shares, with all warrants exercisable at a price per share equal
to the fair market value of our common stock at the time of grant. Landmark has
agreed not to enter into a similar arrangement with any other online or offline
retailer, wholesaler or manufacturer of vitamins, supplements and minerals or
other dietary supplements or natural products. Subject to Landmark's referral
of minimum numbers of new customers, we have agreed not to enter into a similar
arrangement with other specified complementary alternative medicine providers.
Unless earlier terminated or renewed by the parties, the initial term of the
agreement ends on December 31, 2003.
Our Products
Products we offer. The following is a representative sampling of the products
offered on our Web site:
Vitamins Supplements Minerals Herbs Bath & Body Teas
- -------- ----------- -------- ----- ----------- ----
Beta Carotene Acidophilus Boron Alfalfa Acne Products Aloe
Bioflavonoids Adrenal Supplements Calcium Anise Seed After Shave Anise
Biotin Antioxidants Chromium Bayberry Aloe Vera Gels Antioxidant
Children's Vitamins Bee Pollen Copper Calendula Bar Soaps Assorted Herbal
Choline Borage Dolomite Echinacea Body Lotions Black Currant
Folic Acid Bran Germanium Elderberry Cosmetics Chai
Inositol Brewer's Yeast Iron Ginkgo Biloba Deodorants Chamomile
Multivitamins Chlorella Magnesium Ginseng Facial Cleanser Dandelion
Niacin CLA Potassium Goldenseal Root Foot Care Products Dong Quai
Paba Cod Liver Oil Selenium Hyssop Massage Oil Fennel
Pantothenic Acid Creatine Silica Kava Root Shaving Cream Ginseng
Pyridoxine DHEA Zinc Saw Palmetto Sun Care Green
Rutin Evening Primrose Oil St. John's Wort Melatonin
Vitamins A-E Glucosamine
Lecithin
Homeopathy Aromatherapy Books Pet Supplies General Merchandise
- ---------- ------------ ----- ------------ -------------------
Belladonna All Spice Oil Allergies Catnip Air Fresheners
Cell Salts Camphor Oil Arthritis Grooming Products Candy/Gum/Mints
Fever Remedies Cedar Oil Ayurvedic Medicine Herbal Collars Coffee
Headache & Migraine Clove Oil Cooking Pet Books Comforters
Remedies Grapefruit Oil Depression Pet Foods Diapers
Heartburn Remedies Hyssop Oil Gardening Pet Supplements Feminine Care
Nux Vomica Jasmine Oil Herbs Toys Household Cleaners
Oscillococcinum Lavender Oil Homeopathy Juicers & Pulp Extractors
Sabina Orange Oil Juices Lip Balm
Sepia Patchouli Oil Sports Nutrition Paper Products
Rosemary Oil Supplements Pillows
Vitamin Accessories
& Pill Crushers
36
Product sources. We purchase products from several distributors and
manufacturers. We carry inventories of all of our private label products and
selected, higher-turnover branded items and arrange rapid fulfillment from
major distributors and manufacturers for the remainder of our product
offerings. We market and distribute merchandise from national brands such as
Natrol, Twinlab and NatureMade, and we also carry approximately 375 products
under our own private label brand, MotherNature.com, which is manufactured
primarily by Reliance Vitamin Company. To the extent available, our private
label products are displayed first on any search list. In the nine months ended
September 30, 1999, no one national brand accounted for more than 10% of sales.
During the same period, sales of MotherNature.com branded products accounted
for 45% of sales. However, we expect that sales of MotherNature.com branded
products will account for a smaller percentage of sales in future periods as a
result of our recent commencement of promotions of all of our products, not
just our private label brand.
Product and service offering expansion. Consistent with our objective of
becoming the preferred destination for consumers interested in natural and
healthy living products, we intend to expand our product and service offerings
to address the broader natural products market. We recently added a pet
supplies category and a home and fashion category of products to our Web site.
In addition, we recently began offering a private label line of organic coffees
and soaps on our site. We intend to expand our existing product and service
offerings to include the following: pre-packaged dry foods, allergy products,
recycled cards and stationery and spa and travel. We also intend to expand the
products offered under our private label to include these and other categories.
Our Relationship with Rodale
In September 1999, we entered into a strategic relationship with Rodale which
will provide us with access to a wealth of healthy living content to add to our
site as well as access to Rodale's expansive database of over 25 million
customers. We believe this relationship will significantly increase the quality
and depth of our Web site's content by enabling us to include Rodale's books on
vitamins, supplements, minerals, natural healing, alternative medicine, home
health and cooking. Rodale has agreed not to license this content to our
competitors' Web sites for a period of five years after the content first
appears on our Web site. Our agreement with Rodale extends for a period of ten
years with respect to our right to include existing and future Rodale books on
our site. We also will be able to publish the "Supplement News" and
"Alternative Medicine News" columns of Rodale's well-known Prevention magazine
on our site. In addition, MotherNature and Rodale have agreed to undertake
cross-marketing activities that will promote each other's businesses. For
instance, we will sell Rodale books and receive access to Rodale's database of
over 25 million customers and be able to include promotional materials in
Prevention and other Rodale customer mailings. We believe these activities, and
specifically our access to Rodale's database of customers, will provide us with
the opportunity to attract consumers who are particularly interested in natural
and healthy living to our site.
In connection with this relationship, we issued to Rodale 974,044 shares of
our common stock and agreed to use our best efforts to secure the nomination of
a representative of Rodale to our board of directors for so long as Rodale owns
at least 4% of our common stock. We expect that Placido Corpora, President of
Rodale's Book Division and Managing Director of Rodale's Interactive Division,
will be appointed as a director of MotherNature after the completion of this
offering. As part of the relationship, both we and Rodale agreed to certain
exclusivity provisions that will limit our ability to sell print books or print
magazines, and will preclude Rodale from selling vitamins, supplements,
minerals, drugstore or certain other natural and healthy living products. See
"Management--Executive Officers and Directors" and "Principal Stockholders."
37
Customer Support
We believe that a high level of customer service and support is critical to
retaining and expanding our customer base. Our customer service representatives
are currently available from 9 a.m. to 9 p.m. Eastern time, Monday through
Friday, to provide customer assistance by e-mail or telephone. Our customer
service representatives handle questions about orders and how to navigate our
Web site and assist customers in finding desired products. In addition, we
provide each customer with automated e-mail order verification, back-order
processing and shipping confirmation. We provide pre- and post-sales support by
e-mail, facsimile and toll-free telephone service. Upon ordering for the first
time, each customer receives a password-accessible personal account which
allows the customer to view current order status and prior order contents and
to select past orders for one-click reorders.
Order Fulfillment
We recently moved our order fulfillment center to a 25,000 square-foot
facility in Springfield, Massachusetts. This fulfillment center operates five
days per week. All product receiving, warehousing and pick, pack and ship
operations are housed in this facility. We currently stock approximately 10,000
products, including approximately 375 private label products, and have plans to
increase the number of items in-stock over time. All items that are in-stock
are noted as being "in-stock" on our Web site and are available for same day
shipment if the order is received prior to 3:00 p.m. EST. Orders for products
not in our warehouse are usually available for shipment within 24 to 72 hours,
and these items are ordered from suppliers at least once per day. Customers are
not charged for their orders until the ordered product is shipped. Orders are
shipped to locations worldwide by major carriers including the U.S. Postal
Service, UPS, Federal Express and DHL. Since the Springfield fulfillment center
is located across the street from a U.S. Postal Service Priority Mail
processing center, we intend to ship most orders by Priority Mail, thereby
reducing our current shipping costs.
Order processing, inventory management, shipping and billing are primarily
handled by our proprietary system. We are in the process of converting from our
proprietary system to a system licensed from a third-party vendor, Yantra
Corporation, located in Acton, Massachusetts. When this conversion is
completed, the Yantra system, plus other third-party software modules, is
expected to handle order-to-fulfillment processing, including purchase order,
receiving, inventory management, shipping and billing and are expected to be
fully integrated with our front end, or the portion of our Web site technology
that handles user interface, product search, ordering, order tracking and
customer communications.
Technology and Systems
We have implemented a broad array of Web site management, search engine,
customer support, order-processing and order fulfillment systems using a
combination of commercially available, licensed technologies and selected
proprietary technologies. The front end of our Web site is built on industry
standard technologies, including Compaq multiprocessor servers, the Microsoft
Windows NT operating system, Microsoft Internet Information Server and a robust
Oracle database. These technologies are integrated using a variety of
proprietary computer programs, the majority of which are written in HTML,
Javascript and Microsoft Active Server Pages. These programs handle user
interface, product search, ordering, order tracking and customer
communications.
The current Web site front-end can be scaled to handle increases in traffic
and usage. Further, in response to capacity concerns and site development
needs, we recently increased from one to four the number of servers that run
our Web site and are in the process of configuring these servers in a manner to
handle additional traffic to our site. We intend to continue to invest in
technologies that will enable us to handle growth in traffic and advancements
in site infrastructure. In the near future, we plan to implement several new
systems, including tools for providing enhanced personalization of the front
end in response to consumer demographics and shopping preferences.
38
The continued, uninterrupted operation of our Web site and transaction-
processing systems is essential to our business, and we employ a group of
systems administrators to monitor and manage our Web site, network operations
and transaction-processing systems to ensure their continued operation and
reliability. In addition, the system includes redundant hardware on critical
components and can survive a variety of failures with minimal downtime.
We subcontract the hosting of our servers to NaviSite, Inc., an Internet data
center specialist. NaviSite provides Internet connections to multiple Internet
access points, a secure physical environment, climate control, redundant power
and 24-hour-a-day, 7-day-a-week monitoring services. NaviSite currently hosts
several of our servers in its Andover, Massachusetts data center. NaviSite has
adequate capacity for expansion in its Massachusetts facility to support our
growth. NaviSite currently provides us with a dedicated 100 Megabit per second
connection to the Internet for each of our four servers, which can be upgraded
to 400 Megabit per second or beyond. NaviSite has multiple connections to the
Internet through separate connections to various Internet service providers,
and these connections can be expanded as necessary to handle the traffic and
demands of our site. We plan to expand the hosting of our services into
additional facilities to provide additional support for our site in the event
of a disaster at one facility.
Competition
The electronic commerce industry is new, rapidly evolving and intensely
competitive, and we expect competition to intensify in the future. Barriers to
entry are minimal and current and new competitors can launch sites at a
relatively low cost. In addition, the vitamins, supplements, minerals and
natural and healthy living products market is very competitive and highly
fragmented, with no clear dominant leader and increasing public and commercial
attention.
We believe that the principal competitive factors in our market are:
. brand recognition and trust-worthiness;
. ability to attract and retain customers;
. breadth of product selection;
. product pricing;
. availability of educational and authoritative information; and
. quality and responsiveness of customer service.
We believe that we compete favorably on these factors. However, we will have no
control over how successful our competitors are in addressing these factors. In
addition, with little difficulty, our online competitors can duplicate many of
the products, services or content offered on our site.
Our competitors can be divided into several groups including:
. traditional vitamins, supplements, minerals and natural and healthy
living products retailers, including General Nutrition Centers and
Vitamin Shoppe;
. the online retail initiatives of several traditional vitamins,
supplements, minerals and natural and healthy living products retailers,
including VitaminShoppe.com and Vitamins.com;
. online retailers of pharmaceutical and other health-related products
that also carry vitamins, supplements, minerals and natural and healthy
living products, including Drugstore.com, PlanetRx.com, More.com,
SelfCare and CVS.com;
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. independent online retailers specializing in vitamins, supplements,
minerals and natural and healthy living products, including
HealthShop.com, eNutrition, allherb.com, vitamins.net, HealthQuick and
Vitanet;
. mail-order and catalog retailers of vitamins, supplements, minerals and
natural and healthy living products, including NBTY, Amrion, Rexall
Sundown and Vitamin Shoppe, some of which have already developed online
retail outlets; and
. direct sales organizations, retail drugstore chains, health and natural
food store merchants, mass market retail chains and various
manufacturers of natural products.
Many of our current and potential competitors have longer operating
histories, larger customer or user bases, greater brand recognition and
significantly greater financial, marketing and other resources than we have.
Additionally, industry consolidation may increase competition. Recently,
Drugstore.com announced the formation of a strategic relationship with Rite Aid
and General Nutrition Centers. In addition, an online retailer may be acquired
by, receive investments from, or enter into other commercial relationships
with, larger, well-established and well-financed companies as use of the
Internet and other electronic services increases. Competitors have and may
continue to adopt aggressive pricing or inventory availability policies and
devote substantially more resources to Web site and systems development than we
do. Increased competition may result in reduced operating margins, loss of
market share and a diminished brand franchise.
Regulatory Environment
Government regulation of our products. The manufacturing, processing,
formulating, packaging, labeling and advertising of the products we sell are or
may be subject to regulation by one or more federal agencies, including the
FDA, the FTC, the United States Department of Agriculture and the Environmental
Protection Agency. These activities also may be regulated by various agencies
of the states, localities and foreign countries in which consumers reside.
The FDA, in particular, regulates the formulation, manufacture, labeling and
distribution of foods, including dietary supplements, cosmetics and over-the-
counter or homeopathic drugs. Under the Federal Food, Drug, and Cosmetic Act,
the FDA may undertake enforcement actions against companies marketing
unapproved drugs, or "adulterated" or "misbranded" products. The remedies
available to the FDA include: criminal prosecution; an injunction to stop the
sale of a company's products; seizure of products; adverse publicity; and
"voluntary" recalls and labeling changes.
FDA regulations require that certain informational labeling be presented in a
prescribed manner on all foods, drugs, dietary supplements and cosmetics.
Specifically, the Food, Drug, and Cosmetic Act requires that food, including
dietary supplements, drugs and cosmetics, not be "misbranded." A product may be
deemed an unapproved drug and "misbranded" if it bears improper claims or
improper labeling. The FDA has indicated that promotional statements made about
dietary supplements on a company's Web site may constitute "labeling" for
purposes of compliance with the provisions of the Food, Drug, and Cosmetic Act.
A manufacturer or distributor of dietary supplements must notify the FDA when
it markets a product with labeling claims that the product has an effect on the
structure or function of the body. Noncompliance with the Food, Drug, and
Cosmetic Act, and recently enacted amendments to that Act discussed below,
could result in enforcement action by the FDA.
The Food, Drug, and Cosmetic Act has been amended several times with respect
to dietary supplements, most recently by the Nutrition Labeling and Education
Act of 1990 and the Dietary Supplement Health and Education Act of 1994. The
Dietary Supplement Health and Education Act created a new statutory framework
governing the definition, regulation and labeling of dietary supplements. With
respect to definition, the Dietary Supplement Health and Education Act created
a new class of dietary supplements, consisting of vitamins, minerals, herbs,
amino acids and other dietary substances for human use to supplement the diet,
as well as
40
concentrates, metabolites, extracts or combinations of such dietary
ingredients. Generally, under the Dietary Supplement Health and Education Act,
dietary ingredients that were on the market before October 15, 1994 may be sold
without FDA pre-approval and without notifying the FDA. In contrast, a new
dietary ingredient, i.e., one not on the market before October 15, 1994,
requires proof that it has been used as an article of food without being
chemically altered or evidence of a history of use or other evidence of safety
establishing that it is reasonably expected to be safe. Retailers, in addition
to dietary supplement manufacturers, are responsible for ensuring that the
products they market for sale comply with these regulations. Noncompliance
could result in enforcement action by the FDA, an injunction prohibiting the
sale of products deemed to be noncompliant, the seizure of such products and
criminal prosecution.
The FDA has indicated that claims or statements made on a company's Web site
about dietary supplements may constitute "labeling" and thus be subject to
regulation by the FDA. With respect to labeling, the Dietary Supplement Health
and Education Act amends, for dietary supplements, the Nutrition Labeling and
Education Act by providing that "statements of nutritional support," also
referred to as "structure/function claims," may be used in dietary supplement
labeling without FDA pre-approval, provided certain requirements are met. These
statements may describe how particular dietary ingredients affect the structure
or function of the body, or the mechanism of action by which a dietary
ingredient may affect body structure or function, but may not state a drug
claim, i.e., a claim that a dietary supplement will diagnose, mitigate, treat,
cure or prevent a disease. A company making a "statement of nutritional
support" must possess substantiating evidence for the statement, disclose on
the label that the FDA has not reviewed the statement and that the product is
not intended for use for a disease and notify the FDA of the statement within
30 days after its initial use. It is possible that the statements presented in
connection with product descriptions on our site may be determined by the FDA
to be drug claims rather than acceptable statements of nutritional support. In
addition, some of our suppliers may incorporate objectionable statements
directly in their product names or on their products' labels, or otherwise fail
to comply with applicable manufacturing, labeling and registration requirements
for over-the-counter or homeopathic drugs or dietary supplements. As a result,
we may have to remove objectionable statements or products from our site or
modify these statements, or product names or labels, in order to comply with
FDA regulations. Such changes could interfere with our marketing of products
and could cause us to incur significant additional expenses.
In addition, the Dietary Supplement Health and Education Act allows the
dissemination of "third party literature" in connection with the sale of
dietary supplements to consumers at retail if the publication meets statutory
requirements. Under the Dietary Supplement Health and Education Act, "third
party literature" may be distributed if, among other things, it is not false or
misleading, no particular manufacturer or brand of dietary supplement is
promoted, a balanced view of available scientific information on the subject
matter is presented and there is physical separation from dietary supplements
in stores. The extent to which this provision may be used by online retailers
is not yet clear, and we cannot assure you that all pieces of "third party
literature" that may be disseminated in connection with the products we offer
for sale will be determined to be lawful by the FDA. Any such failure could
render the involved product an unapproved drug or a "misbranded" product,
potentially subjecting us to enforcement action by the FDA, and could require
the removal of the noncompliant literature from our Web site or the
modification of our selling methods, interfering with our continued marketing
of that product and causing us to incur significant additional expenses.
Given the fact that the Dietary Supplement Health and Education Act was
enacted only five years ago, the FDA's regulatory policy and enforcement
positions on certain aspects of the new law are still evolving. Moreover,
ongoing and future litigation between dietary supplement companies and the FDA
will likely further refine the legal interpretations of the Dietary Supplement
Health and Education Act. As a result, the regulatory status of certain types
of dietary supplement products, as well as the nature and extent of permissible
claims will remain unclear for the foreseeable future. Two areas in particular
that pose potential regulatory risk are the limits on claims implying some
benefit or relationship with a disease or related condition and the application
of the physical separation requirement for "third party literature" as applied
to Internet sales.
41
The FDA currently proposes to regulate the sale of non-prescription products
containing ephedra, a natural product that contains a small percentage of the
ephedrine alkaloids that are used in some prescription and over-the-counter
stimulants and antihistimines. Less than 1% of our 1998 revenues were derived
from products that contain ephedra. We do not believe that a complete loss of
sales of these products or further restrictions in jurisdictions in which these
products may be sold would materially impair our operating results or financial
condition.
In addition to the regulatory scheme under the Food, Drug and Cosmetic Act,
the advertising and promotion of dietary supplements, foods, over-the-counter
drugs and cosmetics is subject to scrutiny by the FTC. The Federal Trade
Commission Act prohibits "unfair or deceptive" advertising or marketing
practices, and the FTC has pursued numerous food and dietary supplement
manufacturers and retailers for deceptive advertising or failure to
substantiate promotional claims, including, in many instances, claims made via
the Internet. The FTC has the power to seek administrative or judicial relief
prohibiting a wide variety of claims, to enjoin future advertising, to seek
redress or restitution payments and to seek a consent order and seek monetary
penalties for the violation of a consent order. In general, existing laws and
regulations apply fully to transactions and other activity on the Internet. The
FTC is in the process of reviewing its policies regarding the applicability of
its rules and its consumer protection guides to the Internet and other
electronic media. The FTC has already undertaken a new monitoring and
enforcement initiative, "Operation Cure-All," targeting allegedly bogus health
claims for products and treatments offered for sale on the Internet.
Many states impose their own labeling or safety requirements that differ from
or add to existing federal requirements. For example, the State of California
and the National Resources Defense Council filed lawsuits against a large
number of manufacturers of dietary supplements containing calcium, claiming
that naturally-occurring lead levels in these supplements exceed acceptable
levels under California law. Although this lawsuit has since been settled by
the parties involved, we cannot assure you that we will not be the subject of
future claims asserted by the State of California or private parties or that
any such claim might not result in significant additional expenses. Also, we
cannot assure you that other states will not enact legislation similar to that
enacted by the State of California or that such legislation will not extend to
any of the other products that we offer for sale.
In addition, states enforce their own advertising or unfair and deceptive
trade practices statutes, and the vast majority authorize private rights of
action. For example, many state and federal agencies, including state attorneys
general, also have adopted Internet policies and have established dedicated
units or task forces for investigating possible violations of law on the
Internet.
State medical, pharmacy or dietician licensing bodies may also have
regulations or policies that could interfere with our ability to market our
products or services. International regulatory or customs authorities may also
limit our ability to market our products and services to consumers outside the
United States. Additional federal, state, local or international laws or
regulations may also affect our ability to market certain products or services,
such as "organic" foods, insect repellents, pet foods and other items.
We cannot predict the nature of any future laws, regulations, interpretations
or applications, nor can we determine what effect additional governmental
regulations or administrative orders, when and if promulgated, would have on
our business in the future. Although the regulation of dietary supplements is
less restrictive than that of drugs and food additives, we cannot assure you
that the current statutory scheme and regulations applicable to dietary
supplements will remain less restrictive. Further, we cannot assure you that,
under existing laws and regulations, or if more stringent statutes are enacted,
regulations are promulgated or enforcement policies are adopted, we are or will
be in compliance with these existing or new statutes, regulations or
enforcement policies without incurring material expenses or adjusting our
business strategy. Any laws, regulations, enforcement policies, interpretations
or applications applicable to our business could require the reformulation of
certain products to meet new standards, the recall or discontinuance of certain
products not capable of reformulation, additional record keeping, expanded
documentation of the properties of certain products, expanded or different
labeling or scientific substantiation.
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Government regulation of the Internet. In general, existing laws and
regulations apply to transactions and other activity on the Internet; however,
the precise applicability of these laws and regulations to the Internet is
sometimes uncertain. The vast majority of such laws were adopted prior to the
advent of the Internet and, as a result, do not contemplate or address the
unique issues of the Internet or electronic commerce. Nevertheless, numerous
federal and state government agencies have already demonstrated significant
activity in promoting consumer protection and enforcing other regulatory and
disclosure statutes on the Internet. Additionally, due to the increasing use of
the Internet as a medium for commerce and communication, it is possible that
new laws and regulations may be enacted with respect to the Internet and
electronic commerce covering issues such as user privacy, freedom of
expression, advertising, pricing, content and quality of products and services,
taxation, intellectual property rights and information security. The adoption
of such laws or regulations and the applicability of existing laws and
regulations to the Internet may impair the growth of Internet use and result in
a decline in our sales.
We have adopted a privacy policy that sets forth our policies regarding our
use of personal user information and have posted this policy on our site. It is
possible, however, that federal or state legislation may be enacted governing
user privacy, use of personal user information and privacy policy requirements.
In fact, several states have recently proposed legislation that would limit the
uses of personal user information gathered online and require the establishment
of privacy policies. While we have implemented programs designed to enhance the
protection of the privacy of our users, including children, we cannot assure
you that such programs will conform with any regulations that may be
established. We may become subject to such an investigation, or the FTC's
regulatory and enforcement efforts may adversely affect the ability to collect
demographic and personal information from users, which could impair our ability
to provide highly targeted opportunities for advertisers and e-commerce
marketers.
It is also possible that "cookies" may become subject to laws limiting or
prohibiting their use. The term "cookies" refers to information keyed to a
specific server, file pathway or directory location that is stored on a user's
hard drive, possibly without the user's knowledge, which is used to track
demographic information and to target advertising. Although some companies
refuse to use cookies, we use them for a variety of reasons, including the
collection of data derived from the user's Internet activity. We use this data
to better target our sales and marketing efforts to our current and prospective
customer base. Certain currently available Internet browsers allow users to
modify their browser settings to remove cookies at any time or prevent cookies
from being stored on their hard drives. In addition, a number of Internet
commentators, advocates and governmental bodies in the United States and other
countries have urged the passage of laws limiting or abolishing the use of
cookies. Limitations on or elimination of the use of cookies could restrict the
effectiveness of our targeting of advertisements, which could prevent our
business from growing or expose us to unanticipated liabilities.
Planned features of our Web site include the retention of personal
information about our users which we obtain with their consent. We have a
stringent privacy policy covering this information. However, if third parties
were able to penetrate our network security and gain access to, or otherwise
misappropriate, our users' personal information, we could be subject to
liability. Such liability could include claims for misuses of personal
information, such as for unauthorized marketing purposes or unauthorized use of
credit cards. These claims could result in litigation, our involvement in
which, regardless of the outcome, could require us to expend significant
financial resources. Moreover, to the extent any of the data constitute or are
deemed to constitute patient health records, a breach of privacy could violate
federal law.
The European Union has adopted a directive that imposes restrictions on the
collection and use of personal data. Under the European Union directive,
European Union citizens are guaranteed certain rights, including the right of
access to their data, the right to know where the data originated, the right to
have inaccurate data rectified, the right to recourse in the event of unlawful
processing and the right to withhold permission to use their data for direct
marketing.
The European Union directive could, among other things, affect U.S. companies
that collect information over the Internet from individuals in European Union
member countries, and may impose restrictions that are
43
more stringent than current Internet privacy standards in the United States. In
particular, companies with offices located in European Union countries will not
be allowed to send personal information to countries that do not maintain
adequate standards of privacy. The European Union directive does not, however,
define what standards of privacy are adequate, and efforts by the U.S.
government to negotiate "safe harbors" principles defining how U.S. companies
can comply with the E.U. directive have not yet culminated in an agreement. As
a result, we cannot assure you that the European Union directive will not
impair the activities of entities such as our company that engage in data
collection from users in European Union member countries.
A number of legislative proposals have been made at the federal, state and
local level, and by foreign governments, that would impose additional taxes on
the sale of goods and services over the Internet, and certain states have taken
measures to tax Internet-related activities. Although Congress recently placed
a three-year moratorium on new state and local taxes on Internet access or on
discriminatory taxes on electronic commerce, existing state or local laws were
expressly excepted from this moratorium. Further, once this moratorium is
lifted, some type of federal and/or state taxes may be imposed upon Internet
commerce. Such legislation or other attempts at regulating commerce over the
Internet may substantially impair the growth of commerce on the Internet and,
as a result, adversely affect our opportunity to derive financial benefit from
such activities.
Intellectual Property
We regard the protection of our copyrights, service marks, trademarks, trade
dress, which is the appearance and packaging of our products, and trade secrets
as critical to our future success and rely on a combination of copyright,
trademark, service mark and trade secret laws, license agreements and
contractual restrictions to establish and protect our proprietary rights in our
site architecture and technology, products, content and services. We have
entered into confidentiality and invention assignment agreements with our
employees and contractors in order to limit disclosure of our proprietary
information and to protect our ownership interest in our site architecture and
technology. We cannot assure you that these contractual arrangements or the
other steps taken by us to protect our intellectual property will prove
sufficient to prevent misappropriation of our technology or deter independent
third-party development of similar technologies. Moreover, effective trademark,
service mark, copyright and trade secret protection may not be available in
every country in which our services are made available online.
We pursue the registration of our trademarks and service marks in the U.S.
and internationally; however, we cannot assure you that we will be successful
in obtaining the registration of our marks. We have applied for trademarks or
service marks on the following terms and images: "MotherNature.com" combined
with the MotherNature.com logo displayed on our Web site and other materials,
the MotherNature.com logo, "Go Ask Mother@" and "Your Healthy Living
Headquarters." "Natural products, healthy advice" is also one of our
trademarks. We also have rights to the domain names "MotherNature.com,"
"naturalmarkets.com," "naturalmarkets.net" and "naturalmarket.net."
We rely on content that we license from third parties, including our
Encyclopedia of Natural Health, which is licensed from Healthnotes, Inc.,
excerpts from books that are published by Rodale, and portions of our Web site
that have been developed under license agreements with third-party contractors.
We cannot assure you that these third-party content licenses and contractor
arrangements will continue to be available to us on commercially reasonable
terms. Moreover, the loss of such content licenses could require us to develop
similar content internally or could require us to obtain content that is of
lower quality or at a higher cost.
We have licensed in the past, and expect that we may license in the future,
certain of our proprietary rights, such as trademarks or copyrighted material,
to third parties. While we attempt to ensure that the quality of the
MotherNature.com brand is maintained by such licensees, we cannot assure you
that such licensees will not take actions that might result in a decrease in
the value of our proprietary rights.
44
Employees
As of September 30, 1999, we had 163 employees. We also hire a limited number
of independent contractors and temporary employees on a periodic basis. None of
our employees is represented by a labor union, and we consider our employee
relations to be good.
Properties
We currently lease approximately 10,000 square feet of office space in
Concord, Massachusetts, which houses our corporate headquarters. In connection
with relocating our customer support and fulfillment operations from
Pennsylvania to Massachusetts, we signed a lease in June 1999 for approximately
25,000 square feet of mixed-use space in Springfield, Massachusetts.
Additionally, we lease approximately 5,000 square feet of office space in
Acton, Massachusetts which we use for customer support and administrative
functions. Moreover, we have signed a letter of intent to lease approximately
48,000 square feet of office space in Maynard, Massachusetts. Our plan is to
consolidate our administrative and customer service operations currently in
Concord and Acton to this Maynard facility. We believe that these facilities
are adequate for our current operations and that additional leased space can be
obtained as needed on commercially reasonable terms.
Legal Proceedings
On June 30, 1999, a civil complaint was filed as Ross A. Love v.
MotherNature.com, Inc., Mother Nature's General Store, Inc. and Michael Barach,
individually in the Superior Court of Suffolk County, Massachusetts, Case No.
99-3087C. An Amended Complaint and Jury Demand was filed on August 19, 1999 as
Ross A. Love v. MotherNature.com, Inc. and Michael Barach, individually. In the
lawsuit, the plaintiff, a founder and former officer and director, alleges
causes of action including economic duress, breach of fiduciary duty and unfair
and deceptive acts and practices. Mr. Love, among other things, alleges that he
was compelled under economic duress to sign an agreement in connection with his
termination of employment. In addition, Mr. Love claims that we breached our
fiduciary duty to him as a stockholder by allegedly failing to provide him with
certain information in connection with our May 1999 preferred stock financing.
Mr. Love seeks recovery of actual damages which he alleges to be in excess of
$100,000,000. We believe that the claims made by Mr. Love are without merit and
intend to defend this lawsuit vigorously.
45
MANAGEMENT
Executive Officers, Directors and Other Key Employees
The following sets forth the names, ages and positions of our executive
officers and directors as of September 30, 1999:
Name Age Position
---- --- --------
Michael I. Barach.......... 41 Chief Executive Officer, President and Director
Michael L. Bayer........... 34 Chief Financial Officer, Treasurer and Secretary
Donald J. Pettini.......... 36 Chief Technology Officer
Sharon L. Rice............. 51 Vice President, Brand Marketing
Jeffrey A. Steinberg....... 36 Chief Marketing Officer
Beverly J. Weich........... 34 Vice President, Sales and Site Development
Michael A. Greeley(1)...... 36 Director
Keith M. Kerman(2)......... 41 Director
Brent R. Knudsen(2)........ 43 Director
Jason G. Olim.............. 30 Director
Marc D. Poirier(1)......... 35 Director
- --------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
Executive Officers and Directors
Michael I. Barach has served as our Chief Executive Officer and President and
a director since June 1998. From October 1990 until June 1998, Mr. Barach was
employed by Bessemer Venture Partners, where he specialized in the
telecommunications, retail and electronic commerce categories. Mr. Barach was a
Partner at Bessemer from February 1994 until June 1998. Prior to October 1990,
Mr. Barach held several executive management positions in various retail
organizations. Mr. Barach holds a B.A. from Amherst College, where he graduated
summa cum laude and Phi Beta Kappa. Mr. Barach received a J.D. from Harvard Law
School and a M.B.A. from Harvard Business School, where he graduated as a Baker
Scholar.
Michael L. Bayer has served as our Chief Financial Officer, Treasurer and
Secretary since December 1998, having started with us as our Vice President,
Finance in July 1998. From August 1995 until April 1998, he worked for Lifeline
Systems, a manufacturer and service provider of personal response systems,
first as Assistant Treasurer and then as Treasurer. Prior to that, Mr. Bayer
was Vice President, Strategic Planning for Specialty Loose Leaf, Inc., a custom
manufacturer of office supplies, from March 1995 until August 1995, where he
helped launch a leveraged buyout spin-off. From July 1992 until February 1995,
Mr. Bayer served in various financial management roles with Avery Dennison
Corporation, a multinational manufacturer of office supplies and adhesive
products. Mr. Bayer holds a B.S. in Finance and Investments with Distinction
from Babson College and a M.B.A. with Distinction from Cornell University,
where he was a Fried Fellow. Mr. Bayer is a Chartered Financial Analyst.
Donald J. Pettini has served as our Chief Technology Officer since June 1998.
From March 1996 until April 1998, he worked for Digital Equipment Corporation
as the initial member of the AltaVista Engineering Team, where he led several
projects as Project Director, including MilliCent. From 1985 until February
1996, Mr. Pettini held various engineering roles within Digital Equipment
Corporation, including as a member of the internal trouble-shooting team, and
he specialized in network design and encryption technology.
Sharon L. Rice has served as our Vice President, Brand Marketing since
September 1998. From September 1997 until September 1998, Ms. Rice was Director
of Marketing and Sales for financial cards at Polaroid Corporation. From
September 1995 to June 1997, Ms. Rice was Director of Marketing for
46
BankBoston's credit card business. From June 1988 until August 1995, Ms. Rice
held a series of positions of increasing responsibility at Citibank, leaving as
Vice President of Credit Card Marketing. Ms. Rice received her B.A. from
American University and her M.A. in communication from Emerson College.
Jeffrey A. Steinberg has served as our Chief Marketing Officer since February
1999. Prior to that, Mr. Steinberg was Vice President of Marketing for Net
Grocer, Inc., an online retailer of grocery products, from February 1997
through December 1998. From September 1995 to February 1997, he was a manager
at A.T. Kearney, a management consulting firm, where he was involved with their
consumer products consulting practice and specialized in interactive and
database marketing. From October 1991 to September 1995, Mr. Steinberg worked
in the Deloitte & Touche Consulting Group's Retail and Direct Marketing
practice, first as a senior consultant and then as a manager. Since 1994, Mr.
Steinberg has authored three books on interactive marketing, relationship
marketing and database marketing on behalf of the Direct Marketing Association.
Mr. Steinberg holds a B.A. in Computer Science and Geography from Clark
University and a M.S. in Venture Capital Management from the MIT Sloan School
of Management.
Beverly J. Weich has served as our Vice President, Sales and Site Development
since June 1999 and was our Executive Producer from October 1998 through June
1999, having joined us in July 1998 as Director, Online Marketing. Prior to
that, she was a founder and Vice President, Marketing and Operations at E-
guide, an Internet venture, from February 1996 until June 1998. Ms. Weich first
developed natural product knowledge as General Manager of a full-facility
health club from April 1992 to October 1994, and then as General Manager of a
weight loss clinic from November 1994 to May 1995. Ms. Weich received her
B.B.A., cum laude, in Marketing from University of Massachusetts (Amherst) and
a M.B.A. in Marketing and Entrepreneurial Management from the University of
Southern California (Los Angeles).
Michael A. Greeley has served as a director since May 1999. Since June 1994,
Mr. Greeley has been Senior Vice President of GCC Investments, LLC, the private
equity investment group of GC Companies, Inc., which has as its primary
operating subsidiary General Cinema Theatres. Prior to this position, Mr.
Greeley was a Vice President from December 1992 until June 1994 at Wasserstein
Perella & Co., Inc., an international investment bank specializing in mergers
and acquisitions and corporate finance transactions. Mr. Greeley received a
B.A. with honors from Williams College and a M.B.A. from Harvard Business
School.
Keith M. Kerman, M.D. has served as a director since June 1998. Dr. Kerman is
a General Partner of Morgenthaler Venture Partners, a venture capital firm,
which he joined in April 1997. From February 1995 to March 1997, Dr. Kerman was
a partner at Marquette Venture Partners, a venture capital firm. Prior to 1995,
he was President of Corporate Health Administrators, Inc. and Vice President,
Medical Delivery at U.S. Healthcare, from June 1991 to February 1995. Dr.
Kerman is a board-certified internist. He received his medical and
undergraduate degrees from Brown University, where he graduated Phi Beta Kappa
and magna cum laude. He has a M.B.A. from The Wharton School of the University
of Pennsylvania, where he was a Robert Wood Johnson Foundation Scholar.
Jason G. Olim has served as a director since June 1998. Mr. Olim co-founded
CDNow, Inc., an online music retailer, in February 1994 and has been its Chief
Executive Officer since November 1997. Previously, Mr. Olim was employed in the
Professional Services group of Soft-Switch, Inc., a software concern, where he
designed and built software systems for routing mail and documents for domestic
and international clients. Mr. Olim holds a B.A. in Computer Science from Brown
University.
Brent R. Knudsen has served as a director since December 1998. Mr. Knudsen is
currently the Managing Director of North Castle Partners L.L.C., a private
equity firm. Prior to joining North Castle in 1998, Mr. Knudsen served from
November 1997 to July 1998 as President and Chief Executive Officer of GolfWeb,
Inc., a Web site catering to golf enthusiasts, prior to its acquisition by
SportsLine USA, Inc. From September 1996 to November 1997, Mr. Knudsen served
as President of the Sports and Mass Division of Bell Sports, Inc., a bicycle
and bicycle accessory company. From January 1994 to September 1996, Mr. Knudsen
served as a Division President of Specialized Bicycle Components, Inc. From
September 1985 through
47
December 1994, Mr. Knudsen had marketing and business development
responsibilities at the Price Company which was later merged with Costco
Wholesale, Inc. Mr. Knudsen served as the original Vice President of Marketing
and Business Development for Price Club and as Managing Director of Price
Costco Industries. Mr. Knudsen holds degrees from the University of Utah, where
he received a B.A., with highest honors, in Economics and English, and
Georgetown Law School, where he received a J.D.
Marc D. Poirier has served as a director since September 1998. He has been a
General Partner of @Ventures III, L.P., a venture capital firm affiliated with
CMGI, Inc., since August 1998. Mr. Poirier joined CMGI in May 1996 at Planet
Direct, a CMGI subsidiary providing Web portals to consumers through Internet
service providers and other co-branding partners. At Planet Direct, Mr. Poirier
served as Director, Business Development, and then as Vice President of
Electronic Commerce. Mr. Poirier was employed by Ernst & Young LLP in the
Mergers & Acquisitions Group from June 1992 to May 1996 and in the
Entrepreneurial Services Group from September 1986 to August 1990. Mr. Poirier
is a Certified Public Accountant and he holds a B.S. in Business Administration
from Providence College and a M.B.A. from Harvard Business School.
Other Key Employees
Set forth below is the name and recent business experience of each of the key
members of our management team not described above.
Selena Anderson has served as our Director, Purchasing since January 1999.
From August 1996 to August 1998, Ms. Anderson was the Director of Nutrition and
Body Care for Nature's Heartland. From January 1996 to June 1996 she was the
East Coast Regional Sales Manager for Jason Cosmetics. From June 1995 to
December 1995, she was a Sales Representative for Matrix Marketing. From
January 1995 to June 1995 she was the Regional Merchandiser for BIN Sales &
Marketing. From March 1994 to October 1994, she was a Purchasing Assistant for
Wild Oats. From May 1993 through December 1993 she was the Northern California
Regional Sales Manager for Stonyfield Farm. From January 1991 to May 1993, she
was a Field Sales Representative for Sunbelt Sales & Marketing. From January
1985 to January 1991, Ms. Anderson was the founder and owner of Vegan Street,
Inc., one of the first mail-order companies in the US dedicated to cruelty-free
and environmentally safe products. Ms. Anderson holds a B.A. in Psychology from
the University of Maryland.
C. Brad Eisold has served as our Director, Merchandising since January 1999.
Prior to joining us, Mr. Eisold served as Director of Grocery, Frozen Foods,
Dairy, Bulk Foods and Beer/Wine departments at Nature's Heartland stores in the
Boston area from June 1996 to August 1998. From November 1994 through June
1996, Mr. Eisold worked with Harris Teeter Supermarkets, Inc., where he
developed and instituted a natural products program for the chain. From May
1994 until November 1994, Mr. Eisold served as Director, Purchasing at Wild
Oats Markets. From February 1991 through November 1993, Mr. Eisold, as Vice
President of Purchasing with Fresh Fields Markets, developed and directed the
programs for the grocery, frozen foods and dairy departments. Mr. Eisold holds
a B.A. in Psychology and Sociology from American International College and an
M.Ed. in Psychology and Counseling from Springfield College.
Craig N. Weatherby has served as our Director, Content since joining us in
June 1998. From June 1996 to April 1998, Mr. Weatherby researched and wrote The
Arthritis Bible, the lead title from Healing Arts Press for the Spring of 1999.
In February 1997, Mr. Weatherby served as Director of Marketing at Nature's
Heartland, Inc. From November 1992 to April 1998, Mr. Weatherby wrote feature
articles for leading consumer and trade magazines, including Natural Health and
Natural Pharmacy, and operated Write Stuff Marketing, a communications
consultancy producing newsletters and biomedical monographs for major natural
products companies, including Whole Foods Market, Cornucopia Natural Foods,
Wild Harvest/Star Markets and Madis Botanicals. From July 1987 to October 1992
he served as Marketing Manager for the Bread & Circus Whole Foods Supermarket
chain, where he produced a comprehensive educational publications program. Mr.
Weatherby holds a B.A. in History from Windham College.
48
Future Director
In addition to the directors mentioned above, we intend to appoint Placido
Corpora, the President of Rodale's book division, to our board of directors
after completion of this offering:
Placido Corpora has served as the President of the Book Division of Rodale
Inc. since 1990 and as the Managing Director of Rodale's Interactive Division
since August 1999. Previously, Mr. Corpora held various positions with Rodale
since joining the company in 1980. Mr. Corpora holds a B.A. in Accounting from
Moravian College.
Board Committees
The board of directors has established an audit committee and a compensation
committee. The audit committee reviews, acts on and reports to the board of
directors with respect to various auditing and accounting matters, including
the recommendations and performance of our independent auditors, the scope of
the annual audits, fees to be paid to the independent auditors, and our
internal accounting and financial control policies and procedures. The members
of the audit committee are presently Messrs. Poirier and Greeley.
The compensation committee has the power to create our executive compensation
policy and determines the salaries and benefits for our employees, consultants,
directors and other individuals compensated by us. The committee also
administers our stock option and stock purchase plans. The members of the
compensation committee are presently Messrs. Kerman and Knudsen.
Director Compensation
Directors are reimbursed for reasonable out-of-pocket expenses incurred in
attending meetings of the board of directors and for meetings of any committees
of the board of directors on which they serve. No employee will receive
separate compensation for services rendered as a director. Non-employee
directors are also eligible for participation in our 1999 Stock Plan. See the
description of that Plan under the section of this prospectus called
"Management -- Stock Plans." In addition, in June 1998, we granted Mr. Olim an
option to purchase 10,720 shares of our common stock with an exercise price of
$0.22 per share in consideration for his services on our board of directors. In
accordance with Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," no compensation expense is reflected in the
accompanying statements of operations related to these options.
Compensation Committee Interlocks and Insider Participation
No interlocking relationship exists between the board of directors or
compensation committee and the board of directors or compensation committee of
any other company, nor has any interlocking relationship existed in the past.
49
Executive Compensation
The following table sets forth all compensation awarded to, earned by or paid
to our Chief Executive Officer and to another individual who served as our
Chief Executive Officer during 1998 for services rendered in all capacities
during 1998. No other executive officer or employee had compensation in excess
of $100,000 during 1998. We may refer to these officers as our named executive
officers in other parts of this prospectus.
Summary Compensation Table
Long-Term
Compensation
Annual Compensation Awards
-------------------- --------------------
Other Annual Number of Securities All Other
Name and Principal Position Salary Compensation Underlying Options Compensation
- --------------------------- ------- ------------ -------------------- ------------
Michael I. Barach, Chief
Executive Officer and
President(1)........... $37,840 -- 415,501 --
Ross A. Love, former
Chief Executive Officer
and President(2)....... $18,846 $3,800(3) 156,774(2) $41,123(4)
- --------
(1) Mr. Barach assumed the offices of Chief Executive Officer and President in
June 1998.
(2) Mr. Love resigned as Chief Executive Officer and President in June 1998 and
resigned as an employee and director in August 1998. Unvested options to
purchase 141,112 shares automatically expired in connection with his
resignation of employment in August 1998.
(3) Includes $3,000 in relocation expenses.
(4) Represents severance payments in the amount of $26,923 and forgiveness of
indebtedness in the amount of $14,200 in connection with Mr. Love's
resignation of employment.
Employment Agreement
We have entered into an employment agreement with Michael Barach. Mr.
Barach's agreement provides that he shall serve as our Chief Executive Officer
and also requires us to nominate him for the board of directors at each annual
meeting. His employment agreement expires in September 2001, with provision for
annual one-year renewals. Mr. Barach's base salary is $250,000 per year,
subject to increase by the board of directors. Mr. Barach's employment
agreement provides him with severance benefits in the event we terminate him
other than for cause and in the event he terminates his employment for good
reason. The employment agreement also contains provisions that provide Mr.
Barach with a lump sum cash payment if his employment terminates within one
year following certain changes in control of MotherNature.com. Mr. Barach's
employment agreement also contains non-competition and non-solicitation
provisions.
Option Grants During the Year Ended December 31, 1998
The following table sets forth specified information regarding options
granted to each of the named executive officers during the year ended December
31, 1998. We have not granted any stock appreciation rights. The options were
granted under our 1998 Stock Plan. In general, options granted under the plan
vest over four years, with 25% of the option shares granted vesting on the one-
year anniversary of the grant date and the remainder vesting in 12 equal
quarterly installments, and expire on the tenth anniversary of the date of
grant, subject to earlier termination in certain situations related to
resignation or termination of employment. The percentage of total options
granted to employees in 1998 shown in the table below is based on options to
purchase an aggregate of 1,058,118 shares of common stock granted during the
year ended December 31, 1998. Potential realizable values are net of exercise
prices and before taxes, and are based on the initial public offering price of
$13.00 per share and the assumption that our common stock appreciates at the
annual rate shown, compounded annually, from the date of grant until the
expiration of the option term. These
50
numbers are calculated based on Securities and Exchange Commission requirements
and do not reflect our projection or estimate of future stock price growth. The
amounts shown in this table represent hypothetical gains that could be achieved
for the respective options if exercised at the end of the option term. Actual
gains, if any, on stock option exercises will depend on the future performance
of the common stock, the optionholders' continued employment through the option
period and the date on which the options are exercised.
With respect to Mr. Barach's options, options to purchase 50,159 shares are
currently exercisable as of September 30, 1999 and the balance of the options
continue to vest in different increments through October 1, 2002. With respect
to Mr. Love's options, the board of directors accelerated the vesting of
options to purchase 15,662 shares, and unvested options to purchase 141,112
shares automatically expired in connection with his resignation of employment
in August 1998. Since none of Mr. Love's options listed below were outstanding
as of September 30, 1999, the potential realizable values at assumed annual
rates of stock price appreciation are not included in the table below.
Potential Realizable Value at
Assumed Annual Rates of Stock
Price Appreciation
Individual Grants for Option Term
--------------------- ------------------------------
Number of % of Total
Securities Options
Underlying Granted to Exercise
Options Employees Price Per Expiration
Name Granted in 1998 Share Date 5% 10%
---- ---------- ---------- --------- ---------- -------------- ---------------
Michael I. Barach....... 188,664 17.8% $0.22 6/10/08 $ 3,953,573 $ 6,319,990
Michael I. Barach....... 118,585 11.2% $0.22 6/15/08 2,485,023 3,972,438
Michael I. Barach....... 108,252 10.2% $0.75 12/22/08 2,268,489 3,626,296
Ross A. Love............ 34,169 3.2% $0.22 6/10/08 -- --
Ross A. Love............ 122,605 11.6% $0.22 6/15/08 -- --
1998 Option Exercises and Year-End Option Values
The following table sets forth certain information concerning the number and
value of options exercised by each of the named executive officers as of
December 31, 1998 and the number and value of unexercised options held by each
of the named executive officers at December 31, 1998. The value of unexercised
in-the-money options represents the total gain which would be realized if all
in-the-money options held at December 31, 1998 were exercised, determined by
multiplying the number of shares underlying the options by the difference
between the initial public offering price of $13.00 per share and the per share
option exercise price. An option is in-the-money if the fair market value of
the underlying shares exceeds the exercise price of the option.
Number of Value of Unexercised
Securities Underlying In-the-Money
Unexercised Options at Options at
December 31, 1998 December 31, 1998
------------------------- -------------------------
Number of
Shares Acquired Value
Name on Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
---- --------------- -------- ----------- ------------- ----------- -------------
Michael I. Barach....... -- -- 78,609 336,892 $1,004,623 $4,248,106
Ross A. Love............ 15,662 $184,499 -- -- -- --
51
Stock Plans
1998 Stock Plan. Our board of directors and stockholders adopted the
MotherNature.com, Inc. 1998 Stock Plan in June 1998. The aggregate number of
shares of common stock which may be issued under the 1998 Stock Plan, as
amended, is 1,945,739. Under the 1998 Stock Plan, we are authorized to grant
incentive stock options and non-qualified stock options, as well as awards of
common stock and opportunities to make direct purchases of common stock to
employees, consultants, directors and officers. The 1998 Stock Plan is
administered by the compensation committee. The 1998 Stock Plan provides that
the compensation committee has the authority to select the participants and
determine the terms of the stock options, awards and purchase rights granted
under the 1998 Stock Plan. An incentive stock option is not transferable by the
recipient except by will or by the laws of descent and distribution. Non-
qualified stock options and other awards are transferable only to the extent
provided in the agreement relating to such option or award or in response to a
valid domestic relations order. Generally, no incentive stock options may be
exercised more than three months following termination of employment. However,
in the event that termination is due to death or disability, the stock option
is exercisable for a maximum of 180 days after such termination. As of
September 30, 1999, we had outstanding under the 1998 Stock Plan incentive
stock options to purchase 1,053,898 shares of common stock and non-qualified
stock options to purchase 313,110 shares of common stock.
1999 Stock Plan. Our 1999 Stock Plan was adopted by our board of directors
in July 1999 and approved by our stockholders in October 1999. The 1999 Stock
Plan provides for the grant of stock-based awards to employees, officers and
directors of, and consultants or advisors to, MotherNature.com and its
subsidiaries, including incentive stock options and non-qualified stock options
and other equity-based awards. Incentive stock options may be granted only to
our employees. A total of 118,473 shares of common stock may be issued upon the
exercise of options or other awards granted under the 1999 Stock Plan. The
maximum number of shares that may be granted to any employee under the 1999
Stock Plan shall not exceed 59,236 shares of common stock during any calendar
year.
The 1999 Stock Plan is administered by the board of directors and the
compensation committee. The 1999 Stock Plan provides that the board of
directors and the compensation committee have the authority to select the
persons to whom awards are granted and determine the terms of each award,
including the number of shares of common stock to be granted. Payment of the
exercise price of an award may be made in cash, shares of common stock, a
combination of cash or stock or by any other method approved by the board or
compensation committee, consistent with Section 422 of the Internal Revenue
Code and Rule 16b-3 under the Securities Exchange Act of 1934, as amended.
Unless otherwise permitted by us, awards are not assignable or transferable
except by will or the laws of descent and distribution.
The board of directors or the compensation committee may amend, modify or
terminate any award granted or made under the 1999 Stock Plan, so long as such
amendment, modification or termination would not materially and adversely
affect the participant. The board of directors or the compensation committee
may also accelerate or extend the date or dates on which all or any particular
option or options granted under the 1999 Stock Plan may be exercised. No
options or other equity-based awards have been granted to date under the 1999
Stock Plan.
1999 Employee Stock Purchase Plan. The 1999 Employee Stock Purchase Plan was
adopted by our board of directors in July 1999 and approved by the stockholders
in October 1999. The 1999 Employee Stock Purchase Plan provides for the
issuance of a maximum of 100,496 shares of common stock.
The 1999 Employee Stock Purchase Plan is administered by the board of
directors and the compensation committee. All of our employees whose customary
employment is for more than 20 hours per week and for more than five months in
any calendar year and who have completed more than 90 days of employment with
us on or before the first day of any six-month payment period are eligible to
participate in the 1999 Employee Stock Purchase Plan. Outside directors and
employees who would own 5% or more of the total combined voting power or value
of our stock immediately after the grant may not participate in the 1999
Employee Stock
52
Purchase Plan. To participate in the 1999 Employee Stock Purchase Plan, an
employee must authorize us to deduct an amount not less than one percent nor
more than 10 percent of a participant's total cash compensation from his or her
pay during each six-month payment periods. The first payment period will
commence on a date to be determined by the board of directors and end on
December 31, 1999. Thereafter, the payment periods will commence on the first
day of January and July and end on the last day of the following June and
December, respectively, of each year, but in no case shall an employee be
entitled to purchase more than 50 shares in any one payment period. The
exercise price for the option granted in each payment period is 85% of the
lesser of the average market price of the common stock on the first or last
business day of the payment period, in either event rounded up to the nearest
cent. If an employee is not a participant on the last day of the payment
period, such employee is not entitled to exercise his or her option, and the
amount of his or her accumulated payroll deductions will be refunded. Options
granted under the 1999 Employee Stock Purchase Plan may not be transferred or
assigned. An employee's rights under the 1999 Employee Stock Purchase Plan
terminate upon his or her voluntary withdrawal from the plan at any time or
upon termination of employment. No options have been granted to date under the
1999 Employee Stock Purchase Plan.
53
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding beneficial
ownership of our common stock as of September 30, 1999, and as adjusted to
reflect the sale of the shares of common stock offered in this prospectus, by:
. each named executive officer;
. each of our directors;
. each person known by us to be the beneficial owner of more than 5% of
our common stock; and
. all executive officers and directors as a group.
Unless otherwise noted below, the address of each beneficial owner listed on
the table is c/o MotherNature.com, Inc., One Concord Farms, 490 Virginia Road,
Concord, Massachusetts 01742, and each beneficial owner has sole voting and
investment power over the shares shown as beneficially owned except to the
extent authority is shared by spouses under applicable law and except as set
forth in the footnotes to the table.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. Shares of common stock issuable by us to a
person or entity listed in the table pursuant to options or warrants that may
be exercised within 60 days after September 30, 1999 are deemed to be
beneficially owned and outstanding for purposes of calculating the number of
shares and the percentage beneficially owned by that person or entity. However,
these shares are not deemed to be beneficially owned and outstanding for
purposes of computing the percentage beneficially owned by any other person or
entity.
For purposes of calculating the percentage of common stock beneficially owned
by any person, the number of shares deemed outstanding before the offering
includes:
. shares of common stock outstanding as of September 30, 1999;
. shares of common stock issuable upon the conversion of convertible
preferred stock outstanding as of September 30, 1999; and
. shares of common stock issuable upon the exercise of options and
warrants which may be exercised by that person or entity within 60 days
of September 30, 1999.
For purposes of calculating the percentage beneficially owned by any person
or entity, the number of shares deemed outstanding after the offering includes:
. all shares deemed to be outstanding before the offering; and
. shares being sold in this offering.
54
Percentage of Common
Stock Outstanding
------------------------
Number of Shares Before After
Name and Address of Beneficial Owner Beneficially Owned Offering Offering
- ------------------------------------ ------------------ ---------- ----------
Executive Officers and
Directors:
Michael I. Barach(1)............ 225,383 2.0% 1.5%
Ross A. Love.................... 198,364 1.8 1.3
Michael A. Greeley(2)........... 678,589 6.2 4.5
Keith M. Kerman(3).............. 1,245,319 11.3 8.3
Jason G. Olim(4)................ 14,826 * *
Brent R. Knudsen(5)............. -- -- --
Marc D. Poirier(6).............. 1,245,319 11.3 8.3
All executive officers and
directors as a group
(12 persons)(7)................ 3,723,664 33.4 24.4
Five Percent Stockholders:
CMG@Ventures II, LLC(8)......... 1,245,319 11.3 8.3
c/o CMGI, Inc.
100 Brickstone Square
Andover, MA 01810
Morgenthaler Venture Partners
IV, L.P(9)..................... 1,245,319 11.3 8.3
50 Public Square
Suite 2700
Cleveland, OH 44113
Bessemer Venture Entities(10)... 1,245,319 11.3 8.3
83 Walnut Street
Wellesley, MA 02481
Rodale Inc. .................... 974,044 8.9 6.5
33 East Minor Street
Emmaus, PA 18098
North Castle Entities(11)....... 750,559 6.8 5.0
60 Arch Street
Greenwich, CT 06830
Chestnut Hill Nature, LLC....... 678,589 6.2 4.5
c/o GCC Investments, LLC
1300 Boylston Street
Chestnut Hill, MA 02467
Pilinvest S.A................... 678,589 6.2 4.5
c/o Group Arnault
102 Rue Waelhem
1030 Brussels
Belgium
Covestco-AtEura, LLC............ 678,589 6.2% 4.5%
c/o Barnard & Co.
590 Madison Avenue
37th Floor
New York, NY 10022
- --------
* Less than 1%
(1) Includes 153,928 shares held by Mr. Barach. Also includes 8,645 shares
issuable upon exercise of a warrant held by Mr. Barach and 62,810 shares
deemed to be beneficially owned by Mr. Barach pursuant to options
exercisable within 60 days of September 30, 1999.
55
(2) Includes 678,589 shares held by Chestnut Hill Nature LLC, a wholly-owned
subsidiary of GCC Investments, LLC. Mr. Greeley is a Senior Vice President
of GCC Investments, LLC and may be deemed to share voting and investment
power with respect to all shares held by Chestnut Hill Nature LLC. Mr.
Greeley disclaims beneficial ownership of such shares.
(3) Includes 1,236,674 shares held by Morgenthaler Venture Partners IV, L.P.
Also includes 8,645 shares issuable upon exercise of a warrant held by
Morgenthaler Venture Partners IV, L.P. Mr. Kerman is a General Partner of
Morgenthaler Management Partners IV, L.P., which is the General Partner of
Morgenthaler Venture Partners IV, L.P., and may be deemed to share voting
and investment power with respect to all shares held by Morgenthaler
Venture Partners IV, L.P. Mr. Kerman disclaims beneficial ownership of such
shares.
(4) Includes 4,020 shares deemed to be beneficially owned by Mr. Olim pursuant
to options exercisable within 60 days of September 30, 1999.
(5) Does not include 712,423 shares held by North Castle Partners II, L.P.,
17,572 shares held by NCP Co-Investment Fund, L.P., and 20,564 shares held
by NCP-MNC, L.P. Mr. Knudsen is a limited partner of NCP GP II, L.P., which
is the General Partner of North Castle Partners II, L.P., and Mr. Knudsen
is a Managing Director of North Castle GP II, LLC, which serves as the
general partner of NCP GP II, L.P. as well as NCP-MNC, L.P. Mr. Knudsen is
also a Managing Director of NCP Co-Investment G. P., LLC, which is the
general partner of NCP Co-Investment Fund, L.P. Mr. Knudsen does not share
voting and investment power with respect to the shares held by North Castle
Partners II, L.P., NCP Co-Investment Fund, L.P. and NCP-MNC, L.P.
(6) Includes 1,236,674 shares held by CMG@Ventures II, LLC. Also includes
warrants for 8,645 shares issuable upon exercise of a warrant held by
CMG@Ventures II, LLC. Mr. Poirier is a General Partner of CMG@Ventures
Partners III, L.P. which is an affiliate of CMG@Ventures II, LLC. Mr.
Poirier may be deemed to share voting and investment power with respect to
all shares held by CMG@Ventures II, LLC. Mr. Poirier disclaims beneficial
ownership of such shares.
(7) Includes 137,340 shares subject to options exercisable within 60 days of
September 30, 1999 and 25,935 shares issuable upon exercise of warrants.
(8) Includes 1,236,674 shares held by CMG@Ventures II, LLC. Also includes 8,645
shares issuable upon exercise of a warrant held by CMG@Ventures II, LLC.
(9) Includes 1,236,674 shares held by Morgenthaler Venture Partners IV, L.P.
Also includes 8,645 shares issuable upon exercise of a warrant held by
Morgenthaler Venture Partners IV, L.P.
(10) Includes 693,266 shares held by Bessemer Venture Partners IV L.P., 424,831
shares held by Bessec Ventures IV L.P. and 118,577 shares held by Bessemer
Venture Investors L.P. Also includes 4,323 shares issuable upon exercise
of a warrant held by Bessemer Venture Partners IV L.P. and 4,322 shares
issuable upon exercise of a warrant held by Bessec Ventures IV L.P.
(11) Includes 712,423 shares held by North Castle Partners II, L.P., 17,572
shares held by NCP Co-Investment Fund, L.P. and 20,564 shares held by NCP-
MNC, L.P.
56
CERTAIN TRANSACTIONS
We believe that all of the transactions set forth below were made on terms no
less favorable to us than could have been obtained from unaffiliated third
parties. We intend that all future transactions, including loans, between us
and our officers, directors, principal stockholders and their affiliates, will
be approved by a majority of the board of directors, including a majority of
the independent and disinterested members of the board of directors, and will
be on terms no less favorable to us than those that could be obtained from
unaffiliated third parties.
Sales of Stock, Notes and Warrants
Convertible Note and Warrant Financing. In May 1998, we issued and sold
$400,000 of secured convertible promissory notes and warrants to purchase an
aggregate of 34,580 shares of our common stock at an exercise price of $2.31
per share to five accredited investors. Pursuant to their terms, the notes
converted into an aggregate of 1,290,323 shares of series A preferred stock
upon the closing of the series A convertible preferred stock financing
discussed below. Investors owning five percent or more of our shares and our
Chief Executive Officer (who is also President and a director) who participated
in this transaction include:
Investor Promissory Note Warrant Shares
-------- --------------- --------------
CMG@Ventures II, LLC......................... $100,000 8,645
Morgenthaler Ventures IV, L.P................ $100,000 8,645
Bessemer Venture Entities.................... $100,000 8,645
Michael Barach............................... $100,000 8,645
Marc Poirier, one of our directors, is a general partner of @Ventures III,
L.P., which is an affiliate of CMG@Ventures II, LLC. Keith Kerman, one of our
directors, is a general partner of Morgenthaler Management Partners IV, L.P.,
which is the General Partner of Morgenthaler Venture Partners IV, L.P. Bessemer
Venture Partners IV L.P., Bessec Ventures IV L.P. and Bessemer Venture
Investors IV L.P. are affiliated entities, collectively own greater than 10% of
our shares and are collectively referred to in this prospectus as the Bessemer
Venture entities.
Series A Preferred Stock Financing. In June 1998, we issued and sold an
aggregate of 21,451,613 shares of series A preferred stock at a price per share
of $0.31 to seven accredited investors. In July 1998, we issued and sold an
additional 1,864,484 shares of series A preferred stock to nine accredited
investors. The series A shares will be converted into an aggregate of 3,124,232
shares of common stock upon the closing of this offering. We sold 80,645 shares
of series A preferred stock to Jason Olim, one of our directors, as part of
this financing. Investors owning five percent or more of our shares who
purchased shares of series A preferred stock and the number of shares each
purchased, including shares issued upon conversion of the promissory notes
discussed under the heading "Convertible Note and Warrant Financing" above,
include:
Number of
Shares of
Number of Common Stock
Investor Series A Shares upon Conversion
-------- --------------- ---------------
CMG@Ventures II, LLC........................ 6,451,613 864,480
Morgenthaler Venture Partners IV, L.P....... 6,451,613 864,480
Bessemer Venture Entities................... 6,451,613 864,480
Michael Barach.............................. 483,871 64,836
Series B-1 Preferred Stock Financing. In December 1998, we issued and sold
19,950,125 shares of series B-1 preferred stock at a price per share of $0.5213
to 13 accredited investors. In January 1999, we issued and sold an additional
3,069,250 shares of series B-1 preferred stock to one accredited investor. The
series B-1 shares will be converted into an aggregate of 3,084,474 shares of
common stock upon the closing of this offering. Brent Knudsen, one of our
directors, is a limited partner of NCP GP II, L.P., which is the General
Partner of North Castle Partners II, L.P., and Mr. Knudsen is a Managing
Director of North Castle GP II, LLC, which serves as the general partner of NCP
GP II, L.P., as well as NCP-MNC, L.P. Mr. Knudsen is also a Managing Director
of NCP Co-Investment G.P., LLC, which is the general partner of NCP Co-
Investment Fund, L.P., North Castle Partners II, L.P. and NCP-MNC, L.P. are
collectively referred to in this prospectus as
57
the North Castle entities. NCP-MNC, L.P. purchased 3,069,250 shares of series
B-1 preferred stock. Investors owning five percent or more of our shares who
purchased shares of series B-1 preferred stock and the number of shares each
purchased include:
Number of
Shares of
Number of Series Common Stock
Investor B-1 Shares upon Conversion
-------- ---------------- ---------------
CMG@Ventures II, LLC....................... 2,397,852 321,299
Morgenthaler Venture Partners IV, L.P. .... 2,397,852 321,299
Bessemer Venture Entities.................. 2,397,852 321,299
North Castle Entities...................... 3,069,250 411,264
Series C Preferred Stock Financing. In May 1999, we issued and sold
18,409,629 shares of series C preferred stock at a price per share of $2.2787
to 16 accredited investors. These shares will be converted into an aggregate of
2,846,686 shares of common stock upon the closing of this offering, after
giving effect to the amendment to our certificate of incorporation described
below under the heading "Changes in Preferred Stock Conversion Features." Mr.
Michael Greeley, one of our directors, is a Senior Vice President of GCC
Investments, LLC, which wholly-owns Chestnut Hill Nature, LLC. Chestnut Hill
Nature, LLC purchased 4,388,468 shares of series C preferred stock. Investors
owning five percent or more of our shares who purchased shares of series C
preferred stock and the number of shares purchased include:
Number of Shares
of Common Stock
Investor Number of Series C Shares upon Conversion
-------- ------------------------- ----------------
CMG@Ventures II, LLC............. 329,136 50,895
Morgenthaler Venture Partners,
L.P. ........................... 329,136 50,895
Bessemer Venture Entities........ 329,136 50,895
North Castle Entities............ 2,194,234 339,295
Covestco-AtEura LLC.............. 4,388,468 678,589
Pilinvest S.A. .................. 4,388,468 678,589
Chestnut Hill Nature, LLC........ 4,388,468 678,589
Registration Rights. In connection with the preferred stock financings, we
granted registration rights to the preferred stockholders. See "Description of
Securities - Registration Rights."
Changes in Preferred Stock Conversion Features
On July 30, 1999, we filed an amendment to our certificate of incorporation
increasing the number of shares of common stock into which each share of
series C preferred stock will automatically convert in connection with a public
offering of our equity securities from approximately 0.13 shares of common
stock to approximately 0.14 shares of common stock, subject to certain
conditions related to the offering. At the same time, holders of our series A
shares, series B-1 shares and series C shares agreed to automatic conversion of
their series A shares, series B-1 shares and series C shares, respectively,
into shares of our common stock effective upon the closing of this offering.
On October 18, 1999, our Board of Directors approved, subject to stockholder
approval, an amendment to our certificate of incorporation increasing the
number of shares of common stock into which each share of series C preferred
stock will automatically convert in connection with a public offering of our
equity securities from approximately 0.14 shares of common stock to
approximately 0.15 shares of common stock, subject to certain conditions
related to the offering. This amendment to our certificate of incorporation,
which was approved as an inducement to the holders of the series C preferred
stock to convert their shares, also prevents any further adjustments to the
number of shares of common stock issuable upon conversion of the series C
preferred stock.
58
Agreements with Affiliates of CMG@Ventures II, LLC
We have a Web site hosting agreement with NaviSite, Inc. and have an online
advertising agreement with Lycos, Inc. During fiscal 1998 and the nine months
ended September 30, 1999, we paid service fees to NaviSite of $22,643 and
$68,079, respectively, and advertising fees to Lycos of $318,325 and $214,365,
respectively. NaviSite is a majority owned subsidiary of CMGI, Inc. and
approximately 17% of Lycos is owned by CMGI and its affiliates. CMGI, through
its venture capital fund CMG@Ventures II, LLC, owns greater than five percent
of our outstanding common stock.
Employment Agreement
For a description of our employment agreement with Michael Barach, please see
"Management--Employment Agreement."
Certain Agreements
In connection with Ross Love's resignation of employment on August 7, 1998,
we entered into a termination agreement whereby we agreed to pay Mr. Love
salary continuation in the amount of $70,000 per year through May 31, 2000,
forgive $21,100 in indebtedness incurred by Mr. Love while he was an employee,
pay up to $3,000 of Mr. Love's relocation expenses and accelerate the vesting
of Mr. Love's incentive stock options to purchase 15,662 shares of our common
stock.
Relationship with Rodale
For a description of our relationship with Rodale, please see "Business--Our
Relationship with Rodale."
59
DESCRIPTION OF SECURITIES
The following description of our capital stock and certain provisions of our
restated certificate of incorporation and by-laws are summaries and are
qualified by reference to the restated certificate and the restated by-laws
that will become effective upon the closing of this offering. Copies of these
documents have been filed with the Securities and Exchange Commission as
exhibits to our registration statement, of which this prospectus forms a part.
The descriptions of the common stock and preferred stock reflect changes to our
capital structure that will occur upon the closing of this offering.
Upon the completion of this offering, our authorized capital stock will
consist of 93,300,000 shares of common stock, par value $.01 per share, and
1,000,000 shares of preferred stock, par value $.01 per share.
Common Stock
As of September 30, 1999, there were 10,974,370 shares of common stock
outstanding and held of record by 62 stockholders, assuming conversion of all
outstanding shares of preferred stock. In addition, we have reserved an
aggregate of 1,945,739 shares of common stock for issuance under our 1998 Stock
Plan, 118,473 shares of common stock for issuance under our 1999 Stock Plan,
100,496 shares of common stock for issuance under our 1999 Employee Stock
Purchase Plan and 159,938 shares of common stock for issuance upon the exercise
of outstanding common stock purchase warrants.
The holders of common stock are entitled to one vote for each share of common
stock held of record on our books for the election of directors and on all
matters submitted to a vote of stockholders. The holders of common stock are
entitled to receive ratably dividends, if any, when, as and if declared by the
board of directors out of assets legally available therefor, subject to any
preferential dividend rights of any outstanding preferred stock. Upon our
dissolution, liquidation or winding up, the holders of common stock are
entitled to receive ratably our net assets available after the payment of all
debts and other liabilities, subject to the preferential rights of any
outstanding preferred stock. Holders of the common stock have no preemptive,
subscription, redemption or conversion rights. The rights, preferences and
privileges of holders of common stock are subject to, and may be adversely
affected by, the rights of the holders of shares of any series of preferred
stock that we may designate and issue in the future. Upon the closing of this
offering, there will be no shares of preferred stock outstanding.
Preferred Stock
Upon the closing of this offering, the board of directors will be authorized,
without further vote or action by the stockholders, to issue from time to time
up to an aggregate of 1,000,000 shares of preferred stock in one or more series
and to fix or alter the designations, rights, preferences and privileges and
any qualifications, limitations or restrictions of the shares of each such
series of preferred stock, including the dividend rights, dividend rates,
conversion rights, voting rights, terms of redemption including sinking fund
provisions, redemption price or prices, liquidation preferences and the number
of shares constituting any series or designations of such series, any or all of
which may be greater than the rights of common stock. The issuance of preferred
stock could adversely affect the voting power of holders of common stock and
the likelihood that such holders will receive dividend payments and payments
upon liquidation and could have the effect of delaying, deferring or preventing
a change in control. We have no present plans to issue any shares of preferred
stock.
Warrants
In April 1998, we issued warrants to purchase an aggregate of 40,199 shares
of our common stock at an exercise price of $0.07 per share, exercisable at any
time prior to April 29, 2003. These warrants include a cashless exercise
feature, and the holders are entitled to certain customary antidilution
protection, including
60
adjustments to the number of shares of common stock issuable upon exercise of
the warrants in the event of a subdivision or combination of the common stock
or the payment of a stock dividend on our common stock.
In May 1998, we issued warrants to purchase an aggregate of 34,580 shares of
our common stock at an exercise price of $2.31 per share, exercisable at any
time prior to May 1, 2006. These warrants include a cashless exercise feature,
and the holders are entitled to certain customary antidilution protection,
including adjustments to the number of shares of common stock issuable upon
exercise of the warrants in the event of a subdivision or combination of our
common stock or payment of a stock dividend on our common stock. These warrants
were issued in connection with our convertible note and warrant financing. See
"Certain Transactions-- Sales of Stock, Notes and Warrants." The holders of the
warrants are entitled to registration rights pursuant to the registration
rights agreement with respect to the shares of common stock issuable upon
exercise of the warrants. These registration rights are the same as those
afforded the parties to the registration rights agreement. The registration
rights agreement and applicable registration rights are discussed below under
the heading "Registration Rights."
In connection with a subordinated loan and equipment lease financing in
December 1998, we issued warrants to purchase an aggregate of 66,359 shares of
common stock at an exercise price of $3.75 per share, exercisable at any time
prior to the earlier of December 4, 2005 or three years from the effective date
of our initial public offering. The warrants include a cashless exercise
feature, and the holders are entitled to certain customary antidilution
protection, including adjustments to the number of shares of common stock
issuable in the event of a merger or sale of assets, reclassification of
shares, subdivision or combination of our common stock or payment of a stock
dividend on our common stock. The holder of the warrants is entitled to
registration rights pursuant to the registration rights agreement with respect
to the shares of common stock issuable upon exercise of the warrants. These
registration rights are the same as those afforded the parties to the
registration rights agreement. The registration rights agreement and applicable
registration rights are discussed below under the heading "Registration
Rights."
In May 1999, we issued a warrant to purchase an aggregate of 18,376 shares of
our common stock at an exercise price per share of $20.41, exercisable at any
time prior to May 12, 2004. This warrant includes a cashless exercise feature,
and the holder is entitled to certain customary antidilution protection,
including adjustments to the number of shares of common stock issuable upon
exercise of the warrant in the event of a subdivision or combination of our
common stock or payment of a stock dividend on our common stock. Pursuant to
antidilution adjustments, an additional 6,320 shares of common stock will be
issuable under the warrant and the current exercise price of the warrant is
$16.38 per share, subject to certain conditions related to the offering. The
holder of the warrants is entitled to registration rights pursuant to the
registration rights agreement with respect to the shares of common stock
issuable upon exercise of the warrants. These registration rights are the same
as those afforded the parties to the registration rights agreement. The
registration rights agreement and applicable registration rights are discussed
below under the heading "Registration Rights."
In June 1999, we issued a warrant to purchase an aggregate of up to 804
shares of our common stock at an exercise price per share of $18.65,
exercisable at any time prior to June 22, 2002. This warrant includes a
cashless exercise feature, and the holder is entitled to certain customary
antidilution protection, including adjustments to the number of shares of
common stock issuable upon exercise of the warrant in the event of a
subdivision or combination of our common stock or payment of a stock dividend
on our common stock.
Convertible Note
Pursuant to the loan agreement with our subordinated lender, we granted the
lender the right to convert, on one occasion, up to 30% of the original
aggregate principal amount of all advances under the loan agreement into shares
of our common stock at an exercise price of $3.73 per share. This conversion
option expires on December 4, 1999, but we may extend it for a period of 30
days. The maximum amount that we are entitled to borrow under the loan
agreement is $3,000,000. As of the date of this prospectus, we have not
borrowed any money under the loan agreement. The lender is entitled to
registration rights pursuant to the registration rights agreement with respect
to the shares of common stock issuable upon exercise of the conversion option.
The registration rights agreement and applicable registration rights are
discussed below under the heading "Registration Rights."
61
Registration Rights
Pursuant to the terms of a registration rights agreement, after this
offering, the holders of approximately 10,316,892 shares of common stock,
warrants to acquire 125,635 shares of common stock and options to acquire
326,409 shares of common stock will be entitled to certain rights with respect
to the registration of such shares under the Securities Act. Under the terms of
the registration rights agreement, if we propose to register any of our
securities under the Securities Act, either for our own account or for the
account of other security holders exercising registration rights, the holders
are entitled to notice of such registration and are entitled to include shares
of their common stock therein. Additionally, the holders are entitled to
certain demand registration rights pursuant to which they may require us to
file a registration statement under the Securities Act at our expense with
respect to their shares of common stock, and we are required to use our best
efforts to effect that registration. We are not required to effect more than
two of these demand registrations. In addition, the holders are entitled to
demand registration rights pursuant to which they may require us to file a
registration statement under the Securities Act on Form S-3 at our expense with
respect to their shares of common stock, and we are required to use our best
efforts to effect that registration. We are not required to effect more than
one of these Form S-3 demand registrations in any twelve-month period. All of
these registration rights are subject to conditions and limitations, including
the right of the underwriters of an offering to limit the number of shares
included in such registration and our right not to effect a requested
registration within six months following any offering of our securities,
including this offering. In addition, our obligation to register shares of
common stock terminates immediately with respect to a security holder holding
2% or less of our outstanding shares, provided that all shares held by the
holder may be publicly sold within a three-month period pursuant to the
Securities Act. In any event, all registration rights terminate four years from
the date of this prospectus.
Anti-Takeover Effects of Provisions of Delaware Law and Our Certificate of
Incorporation and By-laws
We are subject to the provisions of Section 203 of the Delaware General
Corporation Law. Subject to certain exceptions, Section 203 of Delaware law
prohibits a publicly-held Delaware corporation from engaging in a "business
combination" with an "interested stockholder" for a period of three years after
the date of the transaction in which the person became an interested
stockholder, unless the interested stockholder attained such status with the
approval of the board of directors or unless the business combination is
approved in a prescribed manner. A "business combination" is defined as a
merger, asset sale or other transaction resulting in a financial benefit to the
interested stockholder. Subject to various exceptions, an "interested
stockholder" is a person who, together with affiliates and associates, owns, or
within the past three years did own, 15% or more of a corporation's voting
stock. This statute could prohibit or delay the accomplishment of mergers or
other takeover or change in control attempts with respect to us and,
accordingly, may discourage attempts to acquire us.
In addition, some provisions of the restated certificate and restated by-laws
may be deemed to have an anti-takeover effect and may delay, defer or prevent a
tender offer or takeover attempt that a stockholder might deem to be in his or
her best interest. The existence of these provisions could limit the price that
investors might be willing to pay in the future for shares of our common stock.
These provisions include:
Stockholder Action; Special Meeting of Stockholders. The restated certificate
of incorporation provides that stockholders may not take action by written
consent, but only at a duly called annual or special meeting of stockholders.
The restated certificate of incorporation further provides that special
meetings of our stockholders may be called only by the chairman of the board of
directors, and in no event may the stockholders call a special meeting. Thus,
without approval by the board of directors or chairman, stockholders may take
no action between meetings.
Advance Notice Requirements for Stockholder Proposals and Director
Nominations. The restated by-laws provide that a stockholder seeking to bring
business before an annual meeting of stockholders, or to nominate candidates
for election as directors at an annual meeting of stockholders, must provide
timely notice of this
62
intention in writing. To be timely, a stockholder's notice must be delivered to
or mailed and received at our principal executive offices not less than 120
days prior to the first anniversary of the date of our notice of annual meeting
provided with respect to the previous year's annual meeting of stockholders.
However, if no annual meeting of stockholders was held in the previous year or
the date of the annual meeting of stockholders has been changed to be more than
30 calendar days from the time contemplated at the time of the previous year's
proxy statement, then a proposal shall be received no later than the close of
business on the 10th day following the date on which notice of the date of the
meeting was mailed or a public announcement was made, whichever first occurs.
The restated by-laws also include a similar requirement for making nominations
at special meetings and specify requirements as to the form and content of a
stockholder's notice. These provisions may preclude stockholders from bringing
matters before an annual meeting of stockholders or from making nominations for
directors at an annual or special meeting of stockholders.
Authorized but Unissued Shares. The authorized but unissued shares of common
stock and preferred stock are available for future issuance without stockholder
approval, subject to certain limitations imposed by the Nasdaq National Market.
These additional shares may be utilized for a variety of corporate acquisitions
and employee benefit plans. The existence of authorized but unissued and
unreserved common stock and preferred stock could render more difficult or
discourage an attempt to obtain control of us by means of a proxy contest,
tender offer, merger or otherwise.
Super-majority Voting. Delaware law provides generally that the affirmative
vote of a majority of the shares entitled to vote on any matter is required to
amend a corporation's certificate of incorporation or bylaws, unless a
corporation's certificate of incorporation or bylaws, as the case may be,
require a greater percentage. We have provisions in our restated certificate of
incorporation and restated by-laws which require a super-majority vote of the
stockholders to amend, revise or repeal anti-takeover provisions.
Limitation of Liability and Indemnification Matters
Our restated certificate of incorporation provides that, to the extent
permitted by Delaware law, our directors shall not be personally liable to us
or our stockholders for monetary damages for any breach of fiduciary duty as a
director. Under Delaware law, the directors have a fiduciary duty to us that is
not eliminated by this provision of the certificate and, in appropriate
circumstances, equitable remedies such as injunctive or other forms of
nonmonetary relief will remain available. In addition, each director will
continue to be subject to liability under Delaware law for breach of the
director's duty of loyalty to us, for acts or omissions which are found by a
court of competent jurisdiction to be not in good faith or that involve
intentional misconduct or knowing violations of law, for action leading to
improper personal benefit to the director and for payment of dividends or
approval of stock repurchases or redemptions that are prohibited by Delaware
law. This provision also does not affect the directors' responsibilities under
any other laws, such as the federal securities laws.
Our restated certificate of incorporation further provides for the
indemnification of our directors and officers to the fullest extent permitted
by Section 145 of the Delaware corporate law, provided that this provision
shall not eliminate or limit the liability of a director:
. for any breach of the director's duty of loyalty to the corporation or
its stockholders;
. for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
. arising under Section 174 of the Delaware corporate law; or
. for any transaction from which the director derived an improper personal
benefit.
Transfer Agent and Registrar
Upon the closing of this offering, the transfer agent and registrar for the
common stock will be ChaseMellon Shareholder Services, LLC.
63
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has not been any public market for our common
stock, and we make no prediction as to the effect, if any, that market sales of
shares of common stock or the availability of shares of common stock for sale
will have on the market price of the common stock prevailing from time to time.
Nevertheless, sales of substantial amounts of common stock in the public
market, or the perception that such sales could occur, could adversely affect
the market price of the common stock and could impair our future ability to
raise capital through the sale of equity securities.
Upon the closing of this offering, we will have an aggregate of 15,074,370
shares of common stock outstanding, assuming no exercise of the underwriters'
over-allotment option and no exercise of outstanding options or warrants. Of
the outstanding shares, all of the shares sold in this offering will be freely
tradable, except that any shares purchased by "affiliates" (as that term is
defined in Rule 144 under the Securities Act), may only be sold in compliance
with the limitations described below. The remaining 10,974,370 shares of common
stock will be deemed "restricted securities" as defined in Rule 144. Restricted
securities may be sold in the public market only if registered or if they
qualify for an exemption from registration under Rule 144, including Rule
144(k), or Rule 701 promulgated under the Securities Act, which rules are
summarized below. Giving effect to the lock-up agreements described below and
the provisions of Rule 144, including Rule 144(k), and Rule 701, shares will be
available for sale in the public market as follows:
Number
of Shares Date
--------- ----
181,767 Immediately after the date of this prospectus
249,423 At various times after 90 days from the date of this
prospectus (Rules 144 and 701)
10,543,180 At various times after 180 days from the date of
this prospectus (subject, in some cases, to volume limitations)
In general, under Rule 144, as currently in effect, a person (or persons
whose shares are required to be aggregated), including an affiliate of ours,
who has beneficially owned shares for at least one year is entitled to sell,
within any three-month period commencing 90 days after the date of this
prospectus, a number of shares that does not exceed the greater of 1% of the
then outstanding shares of common stock, approximately 150,744 shares
immediately after this offering, or the average weekly trading volume in the
common stock during the four calendar weeks preceding the date on which notice
of such sale is filed, subject to restrictions. In addition, a person who is
not deemed to have been an affiliate at any time during the 90 days preceding a
sale and who has beneficially owned the shares proposed to be sold for at least
two years would be entitled to sell such shares under Rule 144(k) without
regard to the requirements described above. To the extent that shares were
acquired from an affiliate of ours, such person's holding period for the
purpose of effecting a sale under Rule 144 commences on the date of transfer
from the affiliate.
Our directors and officers and stockholders holding an aggregate of
10,536,480 shares in the aggregate have agreed that they will not offer, sell
or agree to sell, directly or indirectly, or otherwise dispose of any shares of
common stock without the prior written consent of Bear, Stearns & Co. Inc. for
a period of 180 days from the date of this prospectus.
Any of our employees or consultants who purchased his or her shares pursuant
to a written compensatory plan or contract is entitled to rely on the resale
provisions of Rule 701, which permits nonaffiliates to sell their Rule 701
shares without having to comply with the public information, holding period,
volume limitation or notice provisions of Rule 144 and permits affiliates to
sell their Rule 701 shares without having to comply with the Rule 144 holding
period restrictions, in each case commencing 90 days after the date of this
prospectus. As of September 30, 1999, the holders of options exercisable for
approximately 132,298 shares of common stock will be eligible to sell their
shares on the expiration of the 180-day lockup period or subject in some cases
to vesting of such options. In addition, the holders of warrants exercisable
for approximately 159,938 shares of common stock will be eligible to sell their
shares pursuant to Rule 144 at various times beginning 90 days after the date
of this prospectus.
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We intend to file one or more registration statements on Form S-8 under the
Securities Act to register all shares of common stock subject to outstanding
stock options and common stock issued or issuable under our stock plans. We
expect to file the registration statement covering shares offered pursuant to
the 1998 Stock Plan, the 1999 Stock Plan and the 1999 Employee Stock Purchase
Plan within 180 days after the date of this prospectus, permitting the resale
of such shares by nonaffiliates in the public market without restriction under
the Securities Act.
We have agreed not to sell or otherwise dispose of any shares of common stock
during the 180-day period following the date of the prospectus, except that we
may issue, and grant options to purchase, shares of common stock under the 1998
Stock Plan, the 1999 Stock Plan and the 1999 Employee Stock Purchase Plan. In
addition, we may issue shares of common stock in connection with any
acquisition of, or strategic relationship with, another company if the terms of
issuance provide that such common stock shall not be resold prior to the
expiration of the 180-day period referenced in the preceding sentence.
Following this offering, holders of 10,316,892 shares of outstanding common
stock will have demand registration rights with respect to their shares of
common stock, subject to the 180-day lock-up arrangement described above, to
require us to register their shares in any future registration of our
securities. See "Description of Securities -- Registration Rights."
65
UNDERWRITING
Underwriting Agreement
Subject to the terms and conditions set forth in an agreement among the
underwriters and us, each of the underwriters named below, through their
representatives Bear, Stearns & Co. Inc., Hambrecht & Quist LLC and Wit Capital
Corporation, has severally agreed to purchase from us the aggregate number of
shares of our common stock set forth opposite its name below:
Number
Underwriter of Shares
----------- ---------
Bear, Stearns & Co. Inc........................................... 1,699,000
Hambrecht & Quist LLC............................................. 1,132,000
Wit Capital Corporation........................................... 149,000
Banc of America Securities LLC.................................... 70,000
Credit Suisse First Boston Corporation............................ 70,000
Donaldson, Lufkin & Jenrette Securities Corporation............... 70,000
Goldman, Sachs & Co. ............................................. 70,000
Lehman Brothers Inc. ............................................. 70,000
Merrill Lynch, Pierce, Fenner & Smith Incorporated................ 70,000
PaineWebber Incorporated.......................................... 70,000
Salomon Smith Barney Inc. ........................................ 70,000
SoundView Technology Group, Inc. ................................. 70,000
Thomas Weisel Partners LLC........................................ 70,000
William Blair & Company, L.L.C. .................................. 35,000
Blaylock & Partners L.P. ......................................... 35,000
Brean Murray & Co., Inc. ......................................... 35,000
Doft & Co., Inc. ................................................. 35,000
Gaines, Berland Inc. ............................................. 35,000
Goldis Financial Group, Inc. ..................................... 35,000
Gruntal & Co., L.L.C. ............................................ 35,000
Ladenburg Thalmann & Co. Inc. .................................... 35,000
McDonald Investments Inc., a KeyCorp Company...................... 35,000
Needham & Company, Inc. .......................................... 35,000
Tucker Anthony Incorporated....................................... 35,000
Value Investing Partners, Inc. ................................... 35,000
---------
Total........................................................... 4,100,000
=========
The underwriting agreement provides that the obligations of the several
underwriters are subject to approval of various legal matters by their counsel
and to various other conditions, including delivery of legal opinions by our
counsel, the delivery of a letter by our independent auditors and the accuracy
of the representations and warranties made by us in the underwriting agreement.
Under the underwriting agreement, the underwriters are obliged to purchase and
pay for all of the above shares of our common stock if any are purchased.
Public Offering Price
The underwriters propose to offer the shares of our common stock directly to
the public at the offering price set forth on the cover page of this prospectus
and at that price less a concession not in excess of $0.55 per share of common
stock to other dealers who are members of the National Association of
Securities Dealers, Inc. The underwriters may allow, and those dealers may
reallow, concessions not in excess of $0.10 per share of common stock to
certain other dealers. After this offering, the offering price, concessions and
other selling
66
terms may be changed by the underwriters. Our common stock is offered subject
to receipt and acceptance by the underwriters and subject to other conditions,
including the right to reject orders in whole or in part. The underwriters have
informed us that the underwriters do not expect to confirm sales of common
stock to any accounts over which they exercise discretionary authority.
The following table summarizes the per share and total public offering price
of the shares of common stock in the offering, the underwriting compensation to
be paid to the underwriters by us and the proceeds of the offering, before
expenses, to us. The information presented assumes either no exercise or full
exercise by the underwriters of their over-allotment option.
Total
-----------------------
Without With
Over- Over-
Per Share allotment allotment
--------- ----------- -----------
Public offering price.................... $13.00 $53,300,000 $61,295,000
Underwriting discounts and commissions
payable by us........................... 0.91 3,731,000 4,290,650
------ ----------- -----------
Proceeds, before expenses, to us......... $12.09 $49,569,000 $57,004,350
====== =========== ===========
The underwriting discount and commission per share is equal to the public
offering price per share of our common stock less the amount paid by the
underwriters to us per share of common stock.
We estimate total expenses payable by us in connection with this offering,
other than the underwriting discounts and commissions referred to above, will
be approximately $750,000.
Over-Allotment Option to Purchase Additional Shares
We have granted a 30-day over-allotment option to the underwriters to
purchase up to an aggregate of 615,000 additional shares of our common stock
exercisable at the offering price less the underwriting discounts and
commissions, each as set forth on the cover page of this prospectus. If the
underwriters exercise this option in whole or in part, then each of the
underwriters will be obligated to purchase additional shares of common stock in
proportion to their respective purchase commitments as shown in the table set
forth above, subject to various conditions.
Indemnification and Contribution
The underwriting agreement provides that we will indemnify the underwriters
against liabilities specified in the underwriting agreement under the
Securities Act or will contribute to payments that the underwriters may be
required to make in respect of those liabilities.
Lock-Up Agreements
Our directors and officers and stockholders holding 10,536,480 shares have
agreed that they will not offer, sell or agree to sell, directly or indirectly,
or otherwise dispose of any shares of common stock in the public market without
the prior written consent of Bear, Stearns & Co. Inc. for a period of 180 days
from the date of this prospectus.
In addition, we have agreed that for a period of 180 days from the date of
this prospectus, we will not, without the prior written consent of Bear,
Stearns & Co. Inc., offer, sell or otherwise dispose of any shares of common
stock, except that we may issue, and grant options to purchase, shares of
common stock under the 1998 Stock Plan, the 1999 Stock Plan and the 1999
Employee Stock Purchase Plan. In addition, we may issue shares of common stock
in connection with any acquisition of, or strategic relationship with, another
company if the terms of such issuance provide that such common stock shall not
be resold prior to the expiration of the 180-day period referenced in the
preceding sentence.
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Nasdaq National Market Quotation
Prior to this offering, there has been no public market for our common stock.
Consequently, the initial offering price for the common stock was determined by
negotiations between us and the representatives of the underwriters. Among the
factors considered in those negotiations, the primary factors were our results
of operations in recent periods, estimates of our prospects and the industry in
which we compete, an assessment of our management, the general state of the
securities markets at the time of this offering and the prices of similar
securities of generally comparable companies. The common stock has been
approved for quotation on the Nasdaq National Market, under the symbol "MTHR."
We cannot assure you, however, that an active or orderly trading market will
develop for the common stock or that the common stock will trade in the public
market subsequent to this offering at or above the initial offering price.
Stabilization, Syndicate Short Position and Penalty Bids
In order to facilitate this offering, certain persons participating in this
offering may engage in transactions that stabilize, maintain or otherwise
affect the price of the common stock during and after this offering.
Specifically, the underwriters may over-allot or otherwise create a short
position in the common stock for their own account by selling more shares of
common stock than we have actually sold to them. The underwriters may elect to
cover any such short position by purchasing shares of common stock in the open
market and may impose penalty bids, under which selling concessions allowed to
syndicate members or other broker-dealers participating in this offering are
reclaimed if shares of common stock previously distributed in this offering are
repurchased in connection with stabilization transactions or otherwise. The
effect of these transactions may be to stabilize or maintain the market price
at a level above that which might otherwise prevail in the open market. The
imposition of a penalty bid may also affect the price of the common stock to
the extent that it discourages resales thereof. No representation is made as to
the magnitude or effect of any such stabilization or other transactions. Such
transactions may be effected on the Nasdaq National Market or otherwise and, if
commenced, may be discontinued at any time.
Reserved Share Program
At our request, the underwriters have reserved for sale at the initial public
offering price up to 307,500 shares of common stock to be sold in this offering
for sale to our directors, officers, employees, business associates, vendors
and related persons. Purchases of reserved shares are to be made through an
account at Bear, Stearns & Co. Inc. in accordance with Bear, Stearns & Co.
Inc.'s procedures for opening an account and transacting in securities. The
number of shares available for sale to the general public will be reduced to
the extent that any reserved shares are purchased. Any reserved shares not
purchased by our directors, officers, employees, business associates, vendors
and related persons will be offered by the underwriters to the general public
on the same terms as the other shares offered by this prospectus.
Wit Capital Corporation
A prospectus in electronic format is being made available on an Internet Web
site maintained by Wit Capital Corporation. Other than the prospectus in
electronic format, the information on Wit Capital Corporation's Web site and
any information contained on any other Web site maintained by Wit Capital
Corporation is not to be part of this prospectus or the registration statement
of which this prospectus forms a part, has not been approved and/or endorsed by
MotherNature.com or any underwriter in its capacity as underwriter and should
not be relied upon by investors.
Wit Capital Corporation, a member of the National Association of Securities
Dealers, Inc., will participate in the offering as one of the underwriters. The
National Association of Securities Dealers, Inc. approved the membership of Wit
Capital on September 4, 1997. Since that time, Wit Capital has acted as an
underwriter, e-Manager or selected dealer in over 150 public offerings. Except
for its participation as a manager in this offering, Wit Capital has no
relationship with MotherNature.com, Inc., or any of its founders or significant
stockholders.
68
LEGAL MATTERS
The validity of the shares of common stock offered hereby will be passed upon
for us by Testa, Hurwitz & Thibeault, LLP, Boston, Massachusetts. Certain legal
matters in connection with this offering will be passed upon for the
underwriters by Skadden, Arps, Slate, Meagher & Flom LLP, Boston,
Massachusetts.
EXPERTS
Our financial statements and schedule as of December 31, 1998 and 1997, and
for the three years in the period ending December 31, 1998 included in this
prospectus and elsewhere in the registration statement have been audited by
Arthur Andersen LLP, independent public accountants, as indicated in their
reports with respect thereto, and are included herein in reliance upon the
authority of said firm as experts in accounting and auditing in giving said
reports.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1 (including the exhibits, schedules and amendments
thereto) under the Securities Act with respect to the shares of common stock to
be sold in this offering. As permitted by the Securities Exchange Commission's
rules and regulations, this prospectus does not contain all the information set
forth in the registration statement. For further information regarding our
company and the shares of common stock to be sold in this offering, please
refer to the registration statement and the contracts, agreements and other
documents filed as exhibits to the registration statement.
You may read and copy all or any portion of the registration statement or any
other information that we file at the Securities Exchange Commission's public
reference room at 450 Fifth Street, N.W., Washington D.C. 20549. You can
request copies of these documents, upon payment of a duplicating fee, by
writing to the Securities Exchange Commission. Please call the SEC at 1-800-
SEC-0330 for further information on the operation of the public reference
rooms. Our SEC filings, including the registration statement, are also
available to you on the Securities Exchange Commission's Web site
(http://www.SEC.gov).
As a result of this offering, we will become subject to the information and
reporting requirements of the Exchange Act and, in accordance therewith, will
file periodic reports, proxy statements and other information with the
Securities and Exchange Commission.
We intend to furnish to our stockholders annual reports containing financial
statements audited by an independent public accounting firm.
69
MOTHERNATURE.COM, INC.
INDEX TO FINANCIAL STATEMENTS
Page
----
Report of Independent Public Accountants................................. F-2
Balance Sheets as of December 31, 1997 and 1998 and September 30, 1999
(Unaudited)............................................................. F-3
Statements of Operations for the Years Ended December 31, 1996, 1997 and
1998 and for the Nine Months Ended September 30, 1998 and 1999
(Unaudited)............................................................. F-4
Statements of Shareholders' Equity (Deficit) for the Years Ended December
31, 1996, 1997 and 1998 and for the Nine Months Ended September 30, 1999
(Unaudited)............................................................. F-5
Statements of Cash Flows for the Years Ended December 31, 1996, 1997 and
1998 and for the Nine Months Ended September 30, 1998 and 1999
(Unaudited)............................................................. F-6
Notes to Financial Statements............................................ F-7
F-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To MotherNature.com, Inc.:
We have audited the accompanying balance sheets of MotherNature.com, Inc. (a
Delaware corporation) as of December 31, 1998 and 1997, and the related
statements of operations, shareholders' equity (deficit) and cash flows for
each of the three years in the period ended December 31, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of MotherNature.com, Inc. as of
December 31, 1998 and 1997, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1998, in
conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
Boston, Massachusetts
February 17, 1999, except as to the
eleventh paragraph of Note 8 which
is as of December 8, 1999
F-2
MotherNature.com, Inc.
BALANCE SHEETS
December 31,
----------------------
Pro Forma
Shareholders' Equity
September 30, (Deficit) at September 30,
1997 1998 1999 1999
--------- ----------- ------------- --------------------------
(unaudited) (unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash
equivalents........... $ 4,241 $11,243,943 $ 27,647,394
Accounts receivable.... 6,961 10,914 113,363
Subscription
receivable............ -- 1,600,000 --
Inventories............ 30,635 27,752 2,344,855
Prepaid expenses....... -- 172,348 250,204
--------- ----------- ------------
Total current
assets.............. 41,837 13,054,957 30,355,816
--------- ----------- ------------
Property and equipment,
net.................... 48,176 383,856 2,167,799
Intangible assets....... -- -- 16,693,562
Other assets............ 293 22,800 617,422
--------- ----------- ------------
Total assets......... $ 90,306 $13,461,613 $ 49,834,599
========= =========== ============
LIABILITIES AND
SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable....... $ 75,504 $ 31,794 $ 4,817,470
Accrued expenses....... 4,481 681,356 6,930,490
Accrued compensation... 6,835 126,742 667,283
Other current
liabilities........... -- 2,250 --
Current portion of
notes payable......... 15,400 14,492 5,411
Current portion of
capital lease
obligations........... 5,056 4,416 528
--------- ----------- ------------
Total current
liabilities......... 107,276 861,050 12,421,182
Long-term portion of
notes payable.......... 44,517 13,142 11,204
Long-term portion of
capital lease
obligations............ 16,609 7,949 1,096
Shareholder advances
payable................ 13,804 -- --
Commitments and
contingencies (NOTE 9)
SHAREHOLDERS' EQUITY
(DEFICIT):
Preferred stock, $0.01
par value--
Authorized--
67,588,911 shares
Issued and
outstanding--
23,316,097 series A
shares, 23,019,375
series B-1 shares and
18,409,629 series C
shares; entitled to
$7,227,990,
$12,000,000 and
$41,950,022 in
liquidation,
respectively.......... -- 463,354 647,450 --
Common stock, $0 and
$0.01 par value in
1997 and 1998,
respectively, and
$0.01 par value in
1999--Authorized--
93,300,000 shares
Issued and
outstanding--685,634
and 669,972 shares in
1998 and 1997,
respectively,
1,918,978 in 1999,
and 10,974,370 in
1999, pro forma....... -- 6,856 19,190 109,744
Additional paid-in
capital................ 148,313 21,651,361 79,178,585 84,674,038
Deferred compensation... -- (2,289,457) (1,405,431) (1,405,431)
Accumulated deficit..... (240,213) (7,252,642) (41,038,677) (45,977,234)
--------- ----------- ------------ ------------
Total shareholders'
equity (deficit).... (91,900) 12,579,472 37,401,117 37,401,117
========= =========== ============ ============
Total liabilities and
shareholders'
equity.............. $ 90,306 $13,461,613 $ 49,834,599
========= =========== ============
The accompanying notes are an integral part of these financial statements.
F-3
MotherNature.com, Inc.
STATEMENTS OF OPERATIONS
Nine Months Ended
Years Ended December 31, September 30,
-------------------------------- -------------------------
1996 1997 1998 1998 1999
-------- --------- ----------- ----------- ------------
(unaudited)
Net sales............... $ 21,489 $ 193,064 $ 476,549 $ 371,160 $ 2,589,048
Cost of sales........... 10,681 71,484 417,998 225,423 2,263,738
-------- --------- ----------- ----------- ------------
Gross profit.......... 10,808 121,580 58,551 145,737 325,310
Operating expenses:
Selling and
marketing............ 3,564 98,137 3,001,483 1,593,111 25,296,221
Product development... -- -- 2,135,570 1,360,559 4,454,763
General and
administrative....... 87,925 174,725 1,998,408 1,037,310 5,020,097
-------- --------- ----------- ----------- ------------
Total operating
expenses........... 91,489 272,862 7,135,461 3,990,980 34,771,081
-------- --------- ----------- ----------- ------------
Operating loss...... (80,681) (151,282) (7,076,910) (3,845,243) (34,445,771)
Interest income......... -- -- 110,113 66,112 768,921
Interest expense........ -- (8,250) (45,632) (31,074) (109,185)
-------- --------- ----------- ----------- ------------
Net loss............ $(80,681) $(159,532) $(7,012,429) $(3,810,205) $(33,786,035)
======== ========= =========== =========== ============
Basic and diluted net
loss per common share.. $ (0.19) $ (0.25) $ (10.43) $ (5.69) $ (39.89)
======== ========= =========== =========== ============
Shares used to compute
basic and diluted net
loss per common share.. 430,474 650,607 672,289 669,972 846,953
======== ========= =========== =========== ============
Pro forma basic and
diluted net loss per
common share........... $ (2.83) $ (4.54)
=========== ============
Shares used to compute
pro forma basic and
diluted net loss per
common share........... 2,479,964 8,523,440
=========== ============
The accompanying notes are an integral part of these financial statements.
F-4
MotherNature.com, Inc.
STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT) FOR THE
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1999 (UNAUDITED)
Preferred Stock Common Stock
------------------- ------------------ Additional Paid- Deferred Accumulated Total Shareholders'
Share Amount Shares Amount in Capital Compensation Deficit Equity (Deficit)
---------- -------- --------- ------- ---------------- ------------- ------------ -------------------
BALANCE, December
31, 1995.......... -- $ -- 133,994 $ -- $ 200 $ -- $ -- $ 200
---------- -------- --------- ------- ----------- ----------- ------------ -----------
Issuance of
common stock for
services
rendered......... -- -- 502,479 -- 75,000 -- -- 75,000
Net loss......... -- -- -- -- -- -- (80,681) (80,681)
---------- -------- --------- ------- ----------- ----------- ------------ -----------
BALANCE, December
31, 1996.......... -- -- 636,473 -- 75,200 -- (80,681) (5,481)
Issuance of
common stock..... -- -- 13,399 -- 25,000 -- -- 25,000
Issuance of
common stock in
connection with a
note............. -- -- 10,050 -- 18,750 -- -- 18,750
Issuance of
common stock for
services
rendered......... -- -- 10,050 -- 18,750 -- -- 18,750
Deemed capital
contribution..... -- -- -- -- 10,613 -- -- 10,613
Net loss......... -- -- -- -- -- -- (159,532) (159,532)
---------- -------- --------- ------- ----------- ----------- ------------ -----------
BALANCE, December
31, 1997.......... -- -- 669,972 -- 148,313 -- (240,213) (91,900)
Retirement of
common stock in
connection with
reincorporation.. -- -- (669,972) -- (148,313) -- -- (148,313)
Issuance of
common stock in
connection with
reincorporation.. -- -- 669,972 6,700 141,613 -- -- 148,313
Issuance of
detachable
warrants for
Secured
Convertible Note
Financing........ -- -- -- -- 2,416 -- -- 2,416
Conversion of
promissory notes
into Series A
convertible
preferred stock.. 1,290,323 12,903 -- -- 384,681 -- -- 397,584
Issuance of
Series A
convertible
preferred stock,
net of issuance
costs............ 21,854,839 218,548 -- -- 6,516,452 -- -- 6,735,000
Exercise of
common stock
options.......... -- -- 15,662 156 3,351 -- -- 3,507
Conversion of
loans and
advances into
Series A
convertible
preferred stock.. 170,935 1,709 -- -- 51,281 -- -- 52,990
Compensation
expense related
to common stock
options.......... -- -- -- -- 24,855 -- -- 24,855
Deferred
compensation..... -- -- -- -- 2,691,202 (2,691,202) -- --
Amortization of
deferred
compensation..... -- -- -- -- -- 401,745 -- 401,745
Issuance of
detachable
warrants for
Series A
convertible
preferred stock.. -- -- -- -- 106,065 -- -- 106,065
Issuance of
Series B-1
convertible
preferred stock,
net of issuance
costs............ 23,019,375 230,194 -- -- 11,729,445 -- -- 11,959,639
Net loss......... -- -- -- -- -- -- (7,012,429) (7,012,429)
---------- -------- --------- ------- ----------- ----------- ------------ -----------
BALANCE, December
31, 1998.......... 46,335,472 463,354 685,634 6,856 21,651,361 (2,289,457) (7,252,642) 12,579,472
Additional costs
of Series B-1
convertible
preferred stock
issuance......... -- -- -- -- (21,261) -- -- (21,261)
Exercise of
common stock
options and
warrants......... -- -- 259,300 2,593 64,133 -- -- 66,726
Issuance of
Series C
convertible
preferred stock,
net of issuance
costs............ 18,409,629 184,096 -- -- 40,820,153 -- -- 41,004,249
Compensation
expense related
to common stock
options and
warrants......... -- -- -- -- 267,132 -- -- 267,132
Deferred
compensation..... -- -- -- -- (380,147) 380,147 -- --
Amortization of
deferred
compensation..... -- -- -- -- -- 503,879 -- 503,879
Issuance of
common stock in
connection with
Rodale alliance
(Note 3)......... -- -- 974,044 9,741 16,777,214 -- -- 16,786,955
Net loss......... -- -- -- -- -- -- (33,786,035) (33,786,035)
---------- -------- --------- ------- ----------- ----------- ------------ -----------
BALANCE, September
30, 1999
(unaudited)....... 64,745,101 $647,450 1,918,978 $19,190 $79,178,585 $(1,405,431) $(41,038,677) $37,401,117
========== ======== ========= ======= =========== =========== ============ ===========
The accompanying notes are an integral part of these financial statements.
F-5
MotherNature.com, Inc.
STATEMENTS OF CASH FLOWS
Nine Months Ended
Years Ended December 31, September 30,
-------------------------------- -------------------------
1996 1997 1998 1998 1999
-------- --------- ----------- ----------- ------------
(unaudited)
OPERATING ACTIVITIES:
Net loss............... $(80,681) $(159,532) $(7,012,429) $(3,810,205) $(33,786,035)
Adjustments to
reconcile net loss to
net cash used in
operating activities-
Depreciation and
amortization......... 1,364 9,039 850,112 50,932 459,308
Common stock issued
for services
rendered............. 75,000 18,750 -- -- --
Loss on disposal of
equipment............ -- -- 33,265 9,743 32,399
Compensation expense
relating to common
stock options and
warrants............. -- -- 24,855 20,182 267,132
Amortization of
deferred
compensation......... -- -- 401,745 218,122 503,879
Amortization of debt
discount............. -- 4,228 18,045 -- 4,787
Amortization of in-
tangible assets...... -- -- -- -- 413,393
Changes in operating
assets and
liabilities-
Accounts receivable... -- (5,861) (3,953) (30,490) (102,449)
Inventories........... (799) (29,836) 2,883 (34,079) (2,317,103)
Prepaid expenses...... (734) -- (41,283) (14,415) (100,356)
Intangible assets..... -- -- -- -- (320,000)
Other assets.......... -- -- (22,507) (20,905) (594,622)
Accounts payable...... 3,094 72,410 (43,710) (150,214) 4,785,676
Accrued expenses...... 75 4,406 678,950 524,622 6,249,134
Accrued
compensation......... -- 6,835 119,907 (2,967) 540,541
Other current
liabilities.......... -- -- 2,250 -- (2,250)
-------- --------- ----------- ----------- ------------
Net cash used in
operating
activities......... (2,681) (79,561) (4,991,870) (3,239,674) (23,966,566)
-------- --------- ----------- ----------- ------------
INVESTING ACTIVITIES:
Purchases of property
and equipment........ (5,500) (28,391) (1,214,057) (280,848) (2,253,150)
-------- --------- ----------- ----------- ------------
FINANCING ACTIVITIES:
Cash paid to secure
financing............ -- -- (30,000) -- --
Repayments of capital
lease obligations.... -- (2,582) (9,300) (8,177) (10,741)
Proceeds from
shareholder advances
payable.............. 4,382 8,322 -- -- --
Proceeds from
(repayment of) notes
payable.............. 4,650 80,402 (13,217) (13,134) (15,806)
Proceeds from Secured
Convertible
Promissory Note
Financing............ -- -- 400,000 400,000 --
Proceeds from Series
A Preferred
Financing, net of
issuance costs....... -- -- 6,735,000 6,802,694 --
Proceeds from Series
B-1 Preferred
Financing, net of
issuance costs....... -- -- 10,359,639 -- 1,578,739
Proceeds from Series
C Preferred
Financing, net of
issuance costs....... -- -- -- -- 41,004,249
Proceeds from
exercise of common
stock options........ -- -- 3,507 -- 66,726
Loans to officers .... -- -- -- (17,550) --
Proceeds from
issuance of common
stock................ -- 25,000 -- -- --
-------- --------- ----------- ----------- ------------
Net cash provided by
financing
activities......... 9,032 111,142 17,445,629 7,163,833 42,623,167
-------- --------- ----------- ----------- ------------
Net increase in cash
and cash
equivalents........ 851 3,190 11,239,702 3,643,311 16,403,451
CASH AND CASH
EQUIVALENTS, BEGINNING
OF PERIOD............. 200 1,051 4,241 4,241 11,243,943
-------- --------- ----------- ----------- ------------
CASH AND CASH
EQUIVALENTS, END OF
PERIOD................ $ 1,051 $ 4,241 $11,243,943 $ 3,647,552 $ 27,647,394
======== ========= =========== =========== ============
SUPPLEMENTAL DISCLOSURE
OF NONCASH FINANCING
ACTIVITY:
Conversion of loans
and advances into
preferred stock...... $ -- $ -- $ 52,990 $ -- $ --
======== ========= =========== =========== ============
Issuance of common
stock in connection
with Rodale
alliance............. $ -- $ -- $ -- $ -- $ 16,786,955
======== ========= =========== =========== ============
SUPPLEMENTAL DISCLOSURE
OF CASH FLOW
INFORMATION:
Cash paid during the
year for interest.... $ -- $ 740 $ 19,030 $ 5,615 $ 2,351
======== ========= =========== =========== ============
Cash paid during the
year for taxes....... $ -- $ -- $ -- $ -- $ 37,500
======== ========= =========== =========== ============
The accompanying notes are an integral part of these financial statements.
F-6
MotherNature.com, Inc.
NOTES TO FINANCIAL STATEMENTS
December 31, 1998 and September 30, 1999
(Information at September 30, 1999 and for the nine months
ended September 30, 1999 and 1998 is unaudited)
(1) Summary of Significant Accounting Policies
Description of Business
MotherNature.com, Inc. (MotherNature.com or the Company), formerly Mother
Nature's General Store, Inc., is an online retail store and information site
for vitamins, supplements, minerals and other natural and healthy living
products. The Company currently offers approximately 13,000 products on its
site and can special order additional products through its supplier
relationships. MotherNature.com also provides educational and authoritative
news and information about its products and healthy living in general.
The Company, originally incorporated in the Commonwealth of Pennsylvania in
December 1995, reincorporated in the State of Delaware in June 1998 prior to
its first round of financing. Since its inception, the Company has incurred
significant losses and as of September 30, 1999 had an accumulated deficit of
approximately $41.0 million. The Company has incurred costs to develop and
enhance its technology, to create, introduce and enhance its Web site, to
establish marketing and distribution relationships and to build its
administrative organization. The Company intends to continue to invest heavily
in marketing and promotion, development of its Web site, technology and
administrative organization. As a result, the Company believes that it will
incur substantial operating losses for the foreseeable future. There can be no
assurance that the Company will be able to generate sufficient revenues to
achieve or sustain profitability in the future.
The Company has been funded principally from the issuance of preferred stock
in June/July 1998, December 1998/January 1999 and May 1999 (the Series A, B-1,
and C Preferred Financings) in the amounts of $7.2 million, $12.0 million and
$42.0 million, respectively (see Note 8).
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets, liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements and
reported amounts of net sales and expenses during the reporting period. Actual
results could differ from those estimates.
Cash and Cash Equivalents
Cash equivalents are carried at cost plus accrued interest, which
approximates fair value. The Company considers all highly liquid investments
with an original maturity date of three months or less to be cash equivalents.
Revenue Recognition
Net sales, which consist primarily of vitamins, supplements, minerals, and
other natural and healthy living products sold via the Internet, include
outbound shipping and handling charges incurred by the customer and are
recognized at the time of shipment. The Company generally does not extend
credit to customers, except through third-party credit cards. Credit card sales
account for approximately 99% of total sales. Credit under these accounts is
extended by third parties, and accordingly, the Company bears no financial risk
under these agreements except in the case of fraud. The Company's agreements
with third-party credit companies provide for the electronic processing of
credit approvals and the electronic submission of transactions. Upon the
submission of these transactions to the credit card companies, payment is
transmitted to the Company's bank
F-7
MotherNature.com, Inc.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1998 and September 30, 1999
(Information at September 30, 1999 and for the nine months
ended September 30, 1999 and 1998 is unaudited)
account. Accordingly, the Company records these amounts as cash upon the
electronic submission of the transaction to the appropriate processing agency.
Payment from the credit card companies usually occurs within three to five days
and the obligations are reflected in accounts receivable during that waiting
period. Due primarily to the credit card sales, the Company has historically
experienced only immaterial and infrequent bad debt write-offs. As such, no
allowance for doubtful accounts is recorded.
Sales are recorded net of returns, promotional discounts and coupons. Company
policy is to record a sales returns reserve for anticipated future returns;
however, prior to the Company's quarter ended June 30, 1999, sales returns have
been immaterial and were consequently netted from revenue as incurred.
Inventories
Inventories are stated at the lower of cost or market and are valued using
the first-in, first-out (FIFO) method. Cost of sales includes purchased
merchandise and outbound freight incurred by the Company. In the fourth quarter
of 1998, the Company recorded a charge of approximately $73,000 related to the
establishment of a reserve for obsolete and slow-moving inventory.
Selling and Marketing Expense
Selling and marketing expense includes advertising and promotional
expenditures, including sales commissions paid as part of the affiliates
program, Web content expenditures, including third-party content license fees,
fulfillment facility expenses and payroll and related expenses for personnel
engaged in marketing, fulfillment and customer service operations. Advertising
expenditures are expensed as incurred as such efforts historically have not met
the direct-response criteria required for capitalization. MotherNature.com
advertising to date has related primarily to building brand awareness,
including traditional media advertising such as television, radio, print and
billboards and promotions. Total advertising and promotion costs for the years
ended December 31, 1996, 1997 and 1998, and for the nine months ended September
30, 1998 and 1999, were $0, $257 and $1,900,561, and $960,648 and $20,218,401,
respectively.
Product Development Expense
Product development expense includes payroll and related expenses for
merchandising, Web site development, Web design and information technology
personnel and related infrastructure.
Stock-Based Compensation
Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for
Stock-Based Compensation, requires that stock awards granted subsequent to
January 1, 1995 be recognized as compensation expense based on their fair value
at the date of grant. Alternatively, a company may use Accounting Principles
Board Opinion (APB) No. 25, Accounting for Stock Issued to Employees, and
disclose pro forma income amounts that would have resulted from recognizing
such awards at their fair value. The Company has elected to account for stock-
based compensation expense under APB No. 25 and make the required pro forma
disclosures for compensation (see Note 8).
F-8
MotherNature.com, Inc.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1998 and September 30, 1999
(Information at September 30, 1999 and for the nine months
ended September 30, 1999 and 1998 is unaudited)
Income Taxes
The Company records income taxes in accordance with SFAS No. 109, Accounting
for Income Taxes. Under SFAS No. 109, the liability method is used in
accounting for income taxes. Under this method, deferred tax assets and
liabilities are determined based on differences between the financial reporting
and tax bases of assets and liabilities and are measured using enacted tax
rates. A valuation allowance has been established against the deferred tax
assets because the Company believes it is more likely than not that the benefit
will not be realized.
Fair Value of Financial Instruments
The Company's financial instruments include cash and cash equivalents,
accounts receivable, notes payable, capital lease obligations, and accounts
payable, and are carried at cost or carrying value. These amounts were not
materially different from their fair values. The Company uses a discounted cash
flows methodology to calculate the fair value of the notes payable and capital
leases.
Net Loss Per Share
Basic net loss per share is computed by dividing net loss by the weighted
number of common shares outstanding for all periods presented. Diluted net loss
per share reflects the dilutive effect of shares under option plans, warrants
and convertible preferred stock. Potentially dilutive shares outstanding during
the period have been excluded from diluted net loss per share because their
effect would be anti-dilutive. All share amounts in the table below give
retroactive effect to the reverse stock split of October 1999 (See Note 8.)
Nine Months Ended
Years Ended December 31, September 30,
------------------------- --------------------
1996 1997 1998 1998 1999
------- ------- --------- --------- ----------
Weighted average common shares
used in basic and diluted EPS
calculation................... 430,474 650,607 672,289 669,972 846,953
======= ======= ========= ========= ==========
Shares under option plans,
warrants and convertible
preferred stock excluded in
computation of diluted
earnings per share due to
antidilutive effects.......... -- -- 7,524,152 4,169,020 10,202,449
======= ======= ========= ========= ==========
F-9
MotherNature.com, Inc.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1998 and September 30, 1999
(Information at September 30, 1999 and for the nine months
ended September 30, 1999 and 1998 is unaudited)
Pro Forma Net Loss Per Share
The information contained herein pertains only to the calculation of pro
forma net loss per share. Pro forma net loss per share is computed using the
weighted average number of common shares outstanding, including both the pro
forma effects of the automatic conversion of the Company's convertible
preferred stock into shares of the Company's common stock and the impact of the
additional shares to be issued to the Series C Preferred stockholders as an
inducement to convert their shares at the consummation of the initial public
offering (see Note 13), effective upon the closing of the Company's initial
public offering as if such conversion occurred on June 10, 1998, or at the date
of the original issuance, if later.
The calculation of the numerator of the Company's net loss per common share
for the year ended December 31, 1998 and the nine month period ended September
30, 1999 are as follows:
Nine Months
Year Ended Ended
December 31, September 30,
1998 1999
------------ -------------
Net loss....................................... $(7,012,429) $(33,786,035)
Preferred stock dividend (See Note 13)......... -- (4,938,557)
----------- ------------
Adjusted net loss attributable to common
shareholders.................................. $(7,012,429) $(38,724,592)
=========== ============
The weighted average common shares outstanding, including the dilutive effect
of outstanding stock options and warrants, and the pro forma weighted average
number of common shares outstanding for the periods ended December 31, 1998 and
September 30, 1999 are as follows:
Nine Months
Year Ended Ended
December 31, September 30,
1998 1999
------------ -------------
Weighted average common shares used in basic and
diluted EPS calculation........................ 672,289 846,953
Weighted average convertible preferred shares
assumed to convert to common shares............ 1,807,675 7,676,487
--------- ---------
Weighted average number of common shares used in
pro forma basic and diluted EPS calculations... 2,479,964 8,523,440
========= =========
Unaudited Interim Information
The financial information as of September 30, 1999, and for the nine months
ended September 30, 1998 and 1999 is unaudited. In the opinion of management,
such information contains all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of the results of such period.
The interim results are not necessarily indicative of results for the year.
Comprehensive Income
Comprehensive income is defined as the change in net assets of a business
enterprise during a period from transactions generated from nonowner sources.
It includes all changes in equity during a period except those
F-10
MotherNature.com, Inc.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1998 and September 30, 1999
(Information at September 30, 1999 and for the nine months
ended September 30, 1999 and 1998 is unaudited)
resulting from investments by owners and distributions to owners. The Company
had no material other comprehensive income in any of the periods presented.
Segment Information
The Company complies with the provisions of SFAS No. 131, Disclosures about
Segments of an Enterprise and Related Information. The Company identifies its
operating segments based on business activities and management responsibility.
The Company operates in a single business segment selling vitamins,
supplements, minerals and other natural and healthy living products online.
International sales were less than 8% of revenues in all periods.
New Accounting Pronouncements
In March 1998, the American Institute of Certified Public Accountants (AICPA)
issued Statement of Position (SOP) 98-1, Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use, requiring computer software
costs associated with internal-use software to be expensed as incurred until
certain capitalization criteria are met. The Company adopted SOP 98-1 for the
year ended December 31, 1998. Adoption of this statement did not have a
material impact on the Company's financial position or results of operations.
In accordance with SOP 98-1, approximately $32,000 and $14,500 of software
costs were capitalized and expensed during 1998, respectively.
In April 1998, the AICPA issued SOP 98-5, Reporting on Costs of Start-up
Activities, requiring all costs associated with preopening, preoperating and
organization activities to be expensed as incurred. The Company has adopted the
statement for the year ended December 31, 1998 and has expensed all costs of
start-up activities. However, as SOP 98-5 is consistent with the Company's
existing policy, there is no cumulative effect of a change in accounting
principal in the accompanying financial statements.
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No.
133, Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives), and for hedging activities. As
issued, SFAS No. 133 is effective for all fiscal quarters of all fiscal years
beginning after June 15, 1999, with earlier application encouraged. In May
1999, the FASB delayed the effective date of SFAS No. 133 for one year, to
fiscal years beginning after June 15, 2000. The Company does not currently nor
does it intend in the future to issue derivative instruments and therefore does
not expect that the adoption of SFAS No. 133 will have any impact on its
financial position or results of operations.
(2) Property and Equipment
Property and equipment are stated at cost less accumulated depreciation.
Expenditures that significantly improve or extend the life of an asset are
capitalized. Maintenance and repairs are charged to expense when incurred.
Depreciation of property and equipment is calculated on the straight-line basis
over an estimated useful life of two to five years. Leasehold improvements and
equipment under capital leases are amortized over the shorter of the related
lease term or the useful life of the asset.
F-11
MotherNature.com, Inc.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1998 and September 30, 1999
(Information at September 30, 1999 and for the nine months
ended September 30, 1999 and 1998 is unaudited)
Property and equipment consist of the following:
December 31,
-----------------
September 30,
1997 1998 1999
------- -------- -------------
Computer equipment and software........... $20,831 $419,489 $2,287,607
Office equipment and furniture............ 13,009 27,910 270,830
Equipment under capital lease............. 24,298 18,413 5,924
Leasehold improvements.................... -- 16,800 96,317
Motor vehicle............................. -- -- 20,931
------- -------- ----------
58,138 482,612 2,681,609
Less -- Accumulated depreciation and
amortization............................. (9,962) (98,756) (513,810)
------- -------- ----------
$48,176 $383,856 $2,167,799
======= ======== ==========
For the years ended December 31, 1996, 1997 and 1998, depreciation expense
was $1,217, $8,745 and $845,112, respectively. For the nine months ended
September 30, 1998 and 1999, depreciation expense was $50,932 and $436,808,
respectively. The net book value of property and equipment under capital leases
was $21,829 and $11,748 at December 31, 1997 and 1998, respectively, and
$12,866 and $1,316 at September 30, 1998 and 1999, respectively. Amortization
expense for assets under capital lease was $0, $2,469, $4,472, $4,032 and
$1,481 for the years ended December 31, 1996, 1997, 1998 and the nine months
ended September 30, 1998 and 1999, respectively. Amortization expense for
assets under capital lease has been included in depreciation expense for all
periods.
(3) Rodale Alliance
In September 1999, the Company entered into a strategic relationship with
Rodale Inc. whereby the Company issued 974,044 shares of common stock in
exchange for rights to reproduce certain content, the right to utilize certain
customer lists and the provision of certain advertising services. The shares
issued at the close of the transaction were valued at approximately $16.8
million or $17.23 per share. In addition, the Company has paid an aggregate of
$320,000 as one-time licensing fees with respect to the reproduction of certain
Rodale content which was authored by third parties. The Company's Board of
Directors had an independent valuation performed to assist in the allocation of
the consideration paid for the various intangible rights and assets acquired
from Rodale Inc. The value of the customer lists, advertisements and inserts
were based on market prices. Any residual value was assigned to the value of
the content.
The Company's intangible assets, and their estimated useful lives, which are
based on the Company's independent valuation and the terms of the agreement
with Rodale, consist of the following:
December 31,
---------------
September 30, Useful
1997 1998 1999 Life
------ ------ ------------- --------
Customer lists...................... -- -- $ 2,101,584 7 Years
Prevention advertisements........... -- -- 1,137,000 10 Years
Inserts............................. -- -- 463,731 10 Years
Content ............................ -- -- 13,404,640 3 Years
------ ------ -----------
17,106,955
Accumulated amortization............ (--) (--) (413,393)
------ ------ -----------
-- -- $16,693,562
====== ====== ===========
F-12
MotherNature.com, Inc.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1998 and September 30, 1999
(Information at September 30, 1999 and for the nine months
ended September 30, 1999 and 1998 is unaudited)
In accordance with SFAS No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of, the carrying value of
intangible assets will be periodically reviewed by the Company and impairments
will be recognized when the expected future operating cash flows derived from
such intangible assets is less than their carrying value.
(4) Accrued Expenses
Accrued expenses consist of the following:
December 31,
--------------- September 30,
1997 1998 1999
------ -------- -------------
Accrued professional services.................. $1,200 $236,757 $1,082,735
Accrued marketing.............................. -- 243,299 4,840,481
Other accrued expenses......................... 3,281 201,300 1,007,274
------ -------- ----------
$4,481 $681,356 $6,930,490
====== ======== ==========
(5) Employee Benefit Plans
The Company has a savings plan (the 401(k) Plan), which qualifies as a
defined contribution arrangement under Section 401(a), 401(k) and 501(a) of the
Internal Revenue Code. Under the 401(k) Plan, participating employees may defer
a percentage (not to exceed 15%) of their eligible pretax earnings up to the
Internal Revenue Service's annual contribution limit. All employees on the
payroll of the Company are eligible to participate in the 401(k) Plan. The
Company will determine its contributions, if any, based on its current profits
and/or retained earnings; however, no contributions have been made since the
inception of the 401(k) Plan.
(6) Debt
In December 1998, the Company entered into a loan and security agreement (the
Loan Agreement) with a bank (the Bank) to borrow up to $500,000 under a
revolving credit facility (the Credit Facility) and/or a 36-month equipment
term loan facility (the Equipment Loan). The interest rate per year on the
Credit Facility is equal to the Bank's prime rate for the initial six months of
the Credit Facility, and the Bank's prime rate plus 25 basis points thereafter.
The interest rate per year on the Equipment Loan is equal to the Bank's prime
rate plus 75 basis points. The Bank's prime rate as of September 30, 1999 was
8.25%. On the first advance date of the Equipment Loan, the Company may, at its
option, elect a fixed interest rate on the Equipment Loan, at a rate determined
by the Bank, which shall thereafter be applicable to all advances under the
Equipment Loan. After the last advance date, the unpaid principal balance of
the Equipment Loan is payable in 30 monthly installments of principal plus
interest. As security for the loan, the Bank has a perfected security interest
in all of the Company's personal property and in all proceeds and products
thereof. To date, the Company has used the Credit Facility to fund corporate
credit card expenses which under the terms of the Credit Facility may not
exceed $175,000 at any time and are required to be repaid on a monthly basis.
In December 1998, the Company entered into a subordinated loan and security
agreement (the Subordinated Loan Agreement) with a commercial lender (the
Commercial Lender). The Subordinated Loan Agreement allows the Company to
borrow up to $3 million, during the one-year period beginning
F-13
MotherNature.com, Inc.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1998 and September 30, 1999
(Information at September 30, 1999 and for the nine months
ended September 30, 1999 and 1998 is unaudited)
December 1998, in minimum installments of $250,000 each, at an interest rate of
prime plus 50 basis points per year, fixed at the time of the advance. The
Commercial Lender's prime rate as of September 30, 1999 was 8.25%. Interest on
each advance is due and payable in 12 equal monthly installments, followed by
24 equal monthly installments of principal and interest. As a condition to
entering into the Subordinated Loan Agreement, the Commercial Lender required
the Company to pay a commitment fee equal to 1% of the total amount available
for borrowing, which the Company has capitalized in the accompanying balance
sheet. As security for the loan, the Commercial Lender has a perfected
secondary security interest in the Company's personal property and in all
proceeds and products thereof. In addition, the Commercial Lender may convert,
on one occasion only, up to 30% of the original aggregate principal amount of
all advances under the Subordinated Loan Agreement into shares of common stock
at a price of $3.73 per share. To date, the Company has had no outstanding
borrowings under the Subordinated Loan Agreement. In connection with the
Subordinated Loan Agreement, the Company issued warrants to the Commercial
Lender to purchase 63,960 shares of common stock with an exercise price of
approximately $3.75 per share. These warrants are exercisable until the earlier
of the seventh anniversary of the date of the Subordinated Loan Agreement or
the third anniversary of the effective date of the Company's initial public
offering. These warrants were valued using the Black-Scholes option-pricing
model (see Note 8).
In addition, the Company also entered into a master lease agreement (the
Lease Agreement) with the Commercial Lender. Pursuant to the Lease Agreement,
the Commercial Lender has agreed to lease to the Company certain equipment
specifically approved by the Commercial Lender, during the one-year period
beginning December 1998, up to an aggregate purchase price of $300,000. The
term of the lease is 48 months, and the Company will have the option at the
expiration of the initial term of the equipment lease to purchase all of the
equipment for a purchase price not to exceed 15% of the equipment cost. As of
December 31, 1998, and as of September 30, 1999, the Company had no outstanding
borrowings under the Lease Agreement. Borrowings under the Lease Agreement will
be accounted for as capital leases when such borrowings occur. In connection
with the Lease Agreement, the Company issued warrants to purchase 2,399 shares
of common stock with an exercise price of approximately $3.75 per share. These
warrants are exercisable until the earlier of the seventh anniversary of the
date of the Lease Agreement or the third anniversary of the effective date of
the Company's initial public offering. These warrants were valued using the
Black-Scholes option-pricing model (see Note 8).
(7) Note Payable
In 1997, the Company borrowed $35,000 from a vendor in the form of a
promissory note (the Note), payable in monthly installments of $2,000 at an
interest rate of 10% per year, commencing January 1, 1999. The Company also
issued a total of 20,100 shares of common stock to the vendor, 10,050 of which
related to the Note. The estimated value of the common stock was recorded as an
original issue discount on the Note and will be amortized over the term of the
Note. At December 31, 1997 and 1998, and at September 30, 1999, the balance on
the Note, net of the original issue discount, was $19,860 and $27,634, and
$16,615, respectively.
(8) Shareholders' Equity
Reincorporation and Authorized Capital
Prior to June 1998, the Company was incorporated in the Commonwealth of
Pennsylvania with authorized capital of 10,000,000 shares of no par value
common stock. In June 1998, the Company reincorporated in the state of Delaware
with authorized capital of 40,000,000 shares of $0.01 par value common stock
and
F-14
MotherNature.com, Inc.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1998 and September 30, 1999
(Information at September 30, 1999 and for the nine months
ended September 30, 1999 and 1998 is unaudited)
47,490,000 shares of $0.01 par value preferred stock. In May 1999, the Company
increased its authorized common stock to 86,000,000 shares and increased its
authorized preferred stock to 67,588,911 shares. In September 1999, the Company
increased its authorized common stock to 93,300,000 shares.
Preferred Stock
The Company has authorized Series A Preferred, Series B-1 Preferred, Series
B-2 Preferred and Series C Preferred. In the event of a public offering of the
Company's equity securities effective on or before December 31, 1999 and
resulting in gross proceeds to the Company of $20,000,000 or greater, each
outstanding share of Series A Preferred, Series B-1 Preferred and Series B-2
Preferred will automatically convert into approximately 0.13 shares of common
stock as described below, and under the circumstances described in Note 13, the
Series C Preferred will automatically convert into approximately 0.15 shares of
common stock.
In June and July 1998, the Company issued 21,854,839 shares of Series A
Preferred at a price of $0.31 per share in conjunction with the Series A
Preferred Financing and 1,290,323 shares of Series A Preferred in conjunction
with the conversion of $400,000 in principal amount of secured convertible
notes. Additionally, in July and November 1998, the Company issued 170,935
shares of Series A Preferred in consideration for the forgiveness of
shareholder advances and loans payable. The Series A Preferred is convertible
at the option of the holder, at any time, at a rate of approximately 0.13
shares of common stock for one share of Series A Preferred, subject to certain
antidilution adjustments.
In December 1998 and January 1999, the Company issued 19,950,125 and
3,069,250 shares of Series B-1 Preferred, respectively, at a price of $0.5213
per share in conjunction with the Series B-1 Preferred Financing. The shares
issued in January 1999 were issued pursuant to a binding agreement entered into
in December 1998 and have been included in the total shares of Series B-1
Preferred in the accompanying financial statements at December 31, 1998. The
Series B-1 Preferred is convertible at the option of the holder, at any time,
at a rate of approximately 0.13 shares of common stock for one share of Series
B-1 Preferred, subject to certain antidilution adjustments.
In May 1999, the Company issued 18,409,629 shares of Series C Preferred at a
price of $2.2787 per share in conjunction with the Series C Preferred
Financing. The Series C Preferred is convertible at the option of the holder,
at any time, at a rate of approximately 0.15 shares of common stock for one
share of Series C Preferred (see Note 13).
Voting
Each share of Series A Preferred, Series B-1 Preferred, Series B-2 Preferred
and Series C Preferred entitles the holder to the number of votes per share as
equals the number of shares of common stock into which each share of preferred
stock is convertible.
Dividends
The holders of Series A Preferred, Series B-1 Preferred, Series B-2 Preferred
and Series C Preferred are entitled to receive, when and if declared by the
Board of Directors, quarterly dividends at the rate of $0.0186, $0.0313, $0.03
and $0.1367 per share, respectively. The preferred dividends are not
cumulative. For the year ended December 31, 1998, and for the nine months ended
September 30, 1999, the Company did not declare any dividends.
F-15
MotherNature.com, Inc.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1998 and September 30, 1999
(Information at September 30, 1999 and for the nine months
ended September 30, 1999 and 1998 is unaudited)
Liquidation
In the event of any liquidation, dissolution or winding up of the Company,
the holders of Series A Preferred, Series B-1 Preferred, Series B-2 Preferred
and Series C Preferred are entitled to receive, in preference to the holders of
common stock, any distribution of assets of the Company in an amount per share
equal to $0.31, $0.5213, $0.50, and $2.2787 respectively, plus any declared but
unpaid dividends.
Common Stock
Each share of common stock entitles the holder to one vote per share. In
April 1998, the Company effected a 5,000-for-1 stock split in the form of a
stock dividend. All references in the financial statements to the number of
shares and to per share amounts have been retroactively restated to reflect
these changes.
In September 1999, the Company entered into a strategic relationship with
Rodale Inc. whereby the Company issued 974,044 shares of common stock in
exchange for access to certain Rodale Inc. content, customer lists and
advertising. (See Note 3.)
In October 1999, the Company's Board of Directors declared a reverse stock
split of 1 share for every 7.463 shares of common stock then outstanding. The
stock split became effective on December 8, 1999. Accordingly, the accompanying
financial statements and footnotes have been restated to reflect the stock
split.
Warrants
In April 1998, the Company issued warrants to purchase an aggregate of 40,199
shares of common stock at an exercise price of $0.07 per share, fair market
value of common stock at date of grant, to a founding employee of the Company
and to a non-employee, early contributor to the Company. These warrants expire
on April 29, 2003. Using the Black-Scholes option-pricing model, the warrants
issued to the non-employee were valued at $50, which was recorded as expense in
1998. In July 1999, 6,700 warrants were exercised by a non-employee.
In May 1998, the Company issued detachable warrants, in connection with a
$400,000 secured convertible note financing (the Secured Convertible Note
Financing) to purchase 34,580 shares of common stock at an exercise price of
$2.31 per share. Using the Black-Scholes option pricing model, the warrants
were valued at approximately $2,400 and were fully expensed at the conversion
date, June 10, 1998. These warrants expire on May 1, 2006.
As consideration for the Subordinated Loan Agreement and the Lease Agreement,
the Commercial Lender received warrants to purchase 66,359 shares of common
stock at a price of approximately $3.75 per share, fair market value of
preferred stock at date of grant (see Note 6). Using the Black-Scholes option-
pricing model, the warrants were valued at $106,065 and were included in
prepaid expenses, net of amortization, on the balance sheet at December 31,
1998. The expense will be amortized over the term of the Subordinated Loan
Agreement and the Lease Agreement.
In May 1999, the Company issued warrants, in connection with the services
provided by an investment bank (the Investment Bank) for the Series C Preferred
Financing, to purchase 18,376 shares of common stock at an exercise price of
$20.41 per share, subject to adjustment of the conversion price of the Series C
Preferred
F-16
MotherNature.com, Inc.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1998 and September 30, 1999
(Information at September 30, 1999 and for the nine months
ended September 30, 1999 and 1998 is unaudited)
(see Note 13). As a result of the events described in Note 13, the option is
currently exercisable for 24,696 shares of common stock at an exercise price of
$16.38 per share. These warrants expire on May 12, 2004. Using the Black-
Scholes option-pricing model, the warrants issued to the Investment Bank were
valued at $200,438, which was recorded as a reduction to the Series C Preferred
Financing proceeds received in 1999.
In June 1999, the Company issued warrants, in connection with a lease
agreement entered into with a landlord (the Landlord), to purchase an aggregate
of up to 804 shares of the Company's common stock at an exercise price per
share of $18.65, fair market value of the common stock at the date of grant.
The warrants are exercisable at any time prior to June 22, 2002. Using the
Black-Scholes option-pricing model, the warrants issued to the landlord were
valued at $9,665, which was recorded as expense in 1999.
Stock Options
In June 1998, the Company adopted the MotherNature.com, Inc. 1998 Stock Plan,
as amended in June 1998 (the Plan), which authorizes the Company to grant
options to purchase up to an aggregate of 929,653 shares of common stock. Later
in June 1998, the Plan was amended to increase the aggregate number of shares
of common stock issuable under the Plan to 1,274,554. In May 1999, the Plan was
amended again to increase the number of shares issuable under the Plan to
1,695,728, and in October 1999 the Plan was amended again to increase the
number of shares issuable under the Plan to 1,945,739. Under the Plan,
incentive and nonqualified stock options, awards of stock and opportunities to
make direct purchases of stock may be granted to employees, officers,
directors, independent contractors and consultants. Generally, options are
granted by the Company's Board of Directors or the Compensation Committee of
the Board of Directors. Each outstanding option granted under the Plan expires
at various dates, not to exceed 10 years from the date of grant, and becomes
exercisable in varying installments as determined by the Board of Directors, or
the Compensation Committee of the Board of Directors, at the date of grant. In
July 1999, the Board of Directors adopted the 1999 Stock Plan, which was
approved by our stockholders in October 1999 (see Note 14).
In 1998, and for the nine months ended September 30, 1999, the Company
granted nonqualified stock options to purchase a total of 3,886 shares and
43,282 shares, respectively, of common stock to non-employees under the Plan
with immediate vesting. As prescribed by SFAS No. 123, the options were valued,
using the Black-Scholes option-pricing model, at $1,305, and $254,149,
respectively, which was recorded as expense in the Company's statements of
operations. In addition, in 1998 the Company granted nonqualified stock options
to purchase a total of 294,788 shares of common stock to non-employees under
the Plan with a three-year vesting period as follows: 34% immediately and an
additional 22% after years one, two and three. Using the Black-Scholes option-
pricing model, these options were valued at $60,000 and will be amortized to
expense over the vesting period. For the year ended December 31, 1998 and the
nine months ended September 30, 1999, $23,500 and $3,318, respectively, was
recorded as expense. During 1999, all the unvested options related to these
grants were cancelled.
F-17
MotherNature.com, Inc.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1998 and September 30, 1999
(Information at September 30, 1999 and for the nine months
ended September 30, 1999 and 1998 is unaudited)
The following table summarizes the Company's stock option activity:
Weighted
Average
Number of Exercise
Shares Price
--------- --------
Balance, December 31, 1997............................... -- $ --
Options granted........................................ 1,367,512 0.30
Options canceled....................................... (158,806) 0.22
Options exercised...................................... (15,662) 0.22
---------
Balance, December 31, 1998............................... 1,193,044 0.21
Options granted........................................ 757,358 16.55
Options canceled....................................... (330,803) 1.90
Options exercised...................................... (252,591) 0.26
--------- ------
Balance, September 30, 1999.............................. 1,367,008 $ 8.93
========= ======
Options granted, net of $378,679 in option cancellations, during fiscal 1998
resulted in a total deferred compensation amount of $2,691,202. Options
granted, net of $729,728 in option cancellations, during the nine month period
ended September 30, 1999 resulted in a total deferred compensation amount of
$(380,147). These amounts will be recognized as compensation expense over the
vesting period. During fiscal 1998 and the nine months ended September 30,
1999, such compensation expense amounted to $401,745 and $503,879,
respectively. At December 31, 1998 and September 30, 1999, 65,848 and 60,467
shares of common stock, respectively, were available for future grant under the
Plan.
The following table summarizes information about options outstanding and
exercisable at September 30, 1999:
Weighted
Average
Remaining Weighted Weighted
Exercise Options Contractual Average Options Average
Prices Outstanding Life Exercise Price Exercisable Exercise Price
- -------- ----------- ----------- -------------- ----------- --------------
$0.22........ 481,624 8.78 years $ 0.22 83,101 $ 0.22
$0.75........ 216,649 9.24 years $ 0.75 3,551 $ 0.75
$2.99........ 88,839 9.31 years $ 2.99 9,380 $ 2.99
$5.22........ 9,862 9.34 years $ 5.22 3,564 $ 5.22
$7.46........ 36,062 9.48 years $ 7.46 4,438 $ 7.46
$14.93....... 63,649 9.62 years $14.93 2,814 $14.93
$18.66....... 34,036 9.73 years $18.66 12,529 $18.66
$22.39....... 436,287 9.86 years $22.39 12,921 $22.39
--------- -------
$0.22-22.39.. 1,367,008 9.32 years $ 8.93 132,298 $ 5.03
========= =======
F-18
MotherNature.com, Inc.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1998 and September 30, 1999
(Information at September 30, 1999 and for the nine months
ended September 30, 1999 and 1998 is unaudited)
If the Company had accounted for the Plan and for the warrants issued in
connection with the Secured Convertible Note Financing in accordance with SFAS
No. 123, the Company's net loss and net loss per share would have been
increased to the following pro forma amounts:
Nine Months Ended
Years Ended December 31, September 30,
-------------------------------- -------------------------
1996 1997 1998 1998 1999
-------- --------- ----------- ----------- ------------
Net loss, as reported... $(80,681) $(159,532) $(7,012,429) $(3,810,205) $(33,786,035)
Net loss, pro forma..... $(80,681) $(159,532) $(7,053,492) $(3,815,703) $(34,219,105)
Basic and diluted net
loss per common share,
as reported............ $ (0.19) $ (0.25) $ (10.43) $ (5.69) $ (39.89)
Basic and diluted net
loss per common share,
pro forma for the
effect of SFAS No.
123.................... $ (0.19) $ (0.25) $ (10.49) $ (5.70) $ (40.40)
Basic and diluted net
loss per common share,
pro forma for the
effect of SFAS No. 123,
for convertible
preferred shares and
the impact of the
additional shares that
will be issued to
Series C preferred
stockholders as an
inducement to convert
(See Note 13).......... $ -- $ -- $ (2.84) $ -- $ (4.59)
The fair value of each option grant and of the warrants issued in connection
with the Secured Convertible Note Financing was calculated using the Black-
Scholes option-pricing model. For the year ended December 31, 1998 and the nine
months ended September 30, 1999 the weighted average value was calculated using
an expected life of approximately four years (two years for non-qualified stock
options), a dividend yield of 0%, a risk-free interest rate of 5.40% and a
volatility of 100%. The weighted-average fair value of options granted during
1998 and for the nine months ended September 30, 1999, using the Black-Scholes
option-pricing model, was $0.2120 and $11.6555, respectively.
(9) Commitments and Contingencies
The Company currently leases office and distribution center facilities and
fixed assets under noncancelable operating and capital leases. Rental expense
under operating lease agreements for 1996, 1997 and 1998 was $0, $4,000 and
$81,400, respectively. Rental expense under operating lease agreements for the
nine months ended September 30, 1998 and 1999 was $46,200 and $231,598,
respectively.
F-19
MotherNature.com, Inc.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1998 and September 30, 1999
(Information at September 30, 1999 and for the nine months
ended September 30, 1999 and 1998 is unaudited)
Future minimum commitments as of December 31, 1998 are as follows:
Capital Operating
Leases Leases Advertising
------- --------- -----------
Year ending December 31,
1999.................... $ 5,297 $101,450 $494,640
2000.................... 4,175 98,750 --
2001.................... 3,053 52,500 --
2002.................... 1,527 -- --
2003.................... -- -- --
Thereafter.............. -- -- --
------- -------- --------
Total minimum lease and
advertising payments... 14,052 $252,700 $494,640
------- -------- --------
Less--Interest.......... 1,687
-------
Present value of net
minimum lease pay-
ments.................. 12,365
Less--Current portion... 4,416
-------
Long-term capital lease
obligation............. $ 7,949
=======
As of September 30, 1999, the Company had media purchase commitments, which
consist of offline advertising, totalling approximately $11,800,000. The
offline advertising includes primarily television, radio and print advertising
commitments, which will expire over the remainder of 1999.
From time to time, the Company may have certain contingent liabilities that
arise in the ordinary course of its business activities. The Company accrues
for contingent liabilities when it is probable that future expenditures will be
made and such expenditures can be reasonably estimated. In the opinion of
management, there are no pending claims of which the outcome is expected to
result in a material adverse effect in the financial position or results of
operations of the Company.
(10) Income Taxes
Due to losses incurred since inception of the Company, there is no income tax
provision or payable in any of the periods presented. As of December 31, 1998,
the Company had approximately $6.8 million of federal tax net operating loss
carryforwards, which begin to expire in 2011. As of September 30, 1999, the
Company had approximately $38.7 million of federal tax net operating loss
carryforwards, which begin to expire in 2011. The net deferred tax asset of the
Company related to the net operating losses is approximately $141,000 and
$2.7 million, and $15.6 million, as of December 31, 1997 and 1998, and
September 30, 1999, respectively. A full valuation allowance was established
for the deferred tax asset, as realization of the tax benefit is not assured.
F-20
MotherNature.com, Inc.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1998 and September 30, 1999
(Information at September 30, 1999 and for the nine months
ended September 30, 1999 and 1998 is unaudited)
Significant items giving rise to deferred tax assets and deferred tax
liabilities at December 31, 1997, 1998, and September 30, 1999, are as follows:
December 31,
----------------------
September 30,
1997 1998 1999
--------- ----------- -------------
Deferred tax assets--
Nondeductible accruals................ $ -- $ 162,374 $ 274,967
Nondeductible reserves................ -- -- 245,170
Intangible assets..................... -- -- 405,774
Other deferred tax assets............. 100 (1,553) 31,032
Net operating loss carryforwards...... 140,637 2,719,000 15,581,000
--------- ----------- ------------
Total deferred tax assets........... 140,737 2,879,821 16,537,943
Deferred tax liabilities................ -- (5,708) (1,259)
Valuation allowance..................... (140,737) (2,874,113) (16,536,684)
--------- ----------- ------------
Total net deferred tax assets
(liabilities).......................... $ -- $ -- $ --
========= =========== ============
In addition, the Company's utilization of its net operating loss
carryforwards may be limited pursuant to the Tax Reform Act of 1986, due to
cumulative changes in ownership in excess of 50%, as defined.
(11) Significant Suppliers
The Company purchases a majority of its product from two suppliers. These
suppliers accounted for approximately 51% of the Company's inventory purchases
in 1998 and 60% for the nine months ended September 30, 1999. One of these
suppliers accounted for 44% of the Company's inventory purchases in 1997. The
Company has no long-term contracts or arrangements with any of its vendors that
guarantee the availability of merchandise, the continuation of particular
payment terms or the extension of credit limits. There can be no assurance that
the Company's current vendors will continue to sell merchandise to the Company
on current terms or that the Company will be able to establish new or extend
current vendor relationships to ensure acquisition of merchandise in a timely
and efficient manner and on acceptable credit terms.
(12) Related Party Transactions
The Company leases office space from a shareholder under a noncancelable
operating lease. For the years ended December 31, 1996, 1997 and 1998, rent
expense on this lease was $0, $4,000 and $41,400, respectively. For the nine
months ended September 30, 1998 and 1999, rent expense on this lease was
$26,200 and $31,700, respectively. As of December 31, 1998 and September 30,
1999, the remaining commitment under the lease was $28,400 and $9,000,
respectively, due in 1999.
The Company purchases inventory from a vendor, which is owned by a
shareholder's relative. For the years ended December 31, 1997 and 1998, the
Company purchased $8,906 and $11,255 of inventory, respectively, from the
vendor. For the nine months ended September 30, 1998 and 1999, the Company
purchased $3,886 and $83,963 of inventory, respectively, from the vendor.
F-21
MotherNature.com, Inc.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1998 and September 30, 1999
(Information at September 30, 1999 and for the nine months
ended September 30, 1999 and 1998 is unaudited)
(13) Initial Public Offering
In July 1999, the Company's Board of Directors authorized management to file
a registration statement with the Securities and Exchange Commission to permit
the Company to sell shares of its common stock to the public.
Also in July 1999, the Company filed an amendment to its certificate of
incorporation increasing the number of shares of common stock into which each
share of Series C Preferred will automatically convert in connection with a
public offering of its equity securities from approximately 0.13 shares of
common stock to approximately 0.14 shares of common stock, subject to certain
conditions related to the offering. At the same time, holders of the series A
shares, series B-1 shares and series C shares agreed to automatic conversion of
their series A shares, series B-1 shares and series C shares, respectively,
into shares of the Company's common stock effective upon the closing of this
offering.
In October 1999, the Company's Board of Directors approved, subject to
stockholder approval, an amendment to the Company's certificate of
incorporation increasing the number of shares of common stock into which each
share of Series C Preferred will automatically convert in connection with a
public offering of its equity securities from approximately 0.14 shares of
common stock to approximately 0.15 shares of common stock, subject to certain
conditions related to the offering. This amendment to the Company's certificate
of incorporation also prevents any further adjustments to the number of shares
of common stock issuable upon conversion of the Series C Preferred.
Pursuant to antidilution adjustments, upon exercise of the warrant issued to
the Investment Bank for services provided in connection with the Series C
Preferred Financing, an additional 6,320 shares of common stock will be
issuable. Upon completion of the Company's initial public offering, and
assuming the Series C Preferred converts at the increased ratio, the Series A,
Series B-1 and Series C Preferred will convert into 9,055,392 shares of common
stock. Of the shares, the Series C Preferred stockholders will receive 379,889
additional shares of common stock that will be issued as an inducement to
convert their shares at the consummation of the offering. The value of these
shares, approximately $4.9 million based upon the initial public offering price
of $13.00 per share, will be treated similarly to a special dividend to the
preferred stockholders and accounted for at the time of the offering within
equity through the accumulated deficit and additional paid-in capital accounts.
Unaudited pro forma stockholders' equity reflects the assumed conversion of the
convertible preferred stock, and the inducement to convert increased the
Company's pro forma loss per share by $0.39 per share from ($4.15) to $(4.54)
per share.
(14) Subsequent Events
1999 Stock Plan
The 1999 Stock Plan was adopted by the Board of Directors in July 1999 and
approved by the stockholders in October 1999. The 1999 Stock Plan provides for
the grant of stock-based awards to employees, officers and directors of, and
consultants or advisors to, the Company and its subsidiaries, including
incentive stock options and non-qualified stock options and other equity-based
awards. Incentive stock options may be granted only to the Company's employees.
A total of 118,473 shares of common stock may be issued upon the exercise of
options or other awards granted under the 1999 Stock Plan. The maximum number
of shares that may be granted to any employee under the 1999 Stock Plan shall
not exceed 59,236 shares of common stock during any calendar year. No options
or other equity-based awards have been granted to date under the 1999 Stock
Plan.
F-22
1999 Employee Stock Purchase Plan
The 1999 Employee Stock Purchase Plan was adopted by the Board of Directors
in July 1999 and approved by the stockholders in October 1999. The 1999
Employee Stock Purchase Plan provides for the issuance of a maximum of 100,496
shares of common stock.
The 1999 Employee Stock Purchase Plan is administered by the Board of
Directors and the Compensation Committee. All of the Company's employees whose
customary employment is for more than 20 hours per week and for more than three
months in any calendar year and who have completed more than 90 days of
employment with the Company on or before the first day of any six-month payment
period are eligible to participate in the 1999 Employee Stock Purchase Plan.
Outside directors and employees who would own 5% or more of the total combined
voting power of value of the Company's stock immediately after the grant may
not participate in the 1999 Employee Stock Purchase Plan. To participate in the
1999 Employee Stock Purchase Plan, an employee must authorize the Company to
deduct an amount not less than one percent nor more than 10 percent of a
participant's total cash compensation from his or her pay during six-month
payment periods. The first payment period will commence on a date to be
determined by the Board of Directors and end on December 31, 1999. Thereafter,
the payment periods will commence on the first day of January and July and end
on the last day of the following June and December, respectively of each year,
but in no case shall an employee be entitled to purchase more than 50 shares in
any one payment period. The exercise price for the option granted in each
payment period is 85% of the lesser of the average market price of the common
stock on the first or last business day of the payment period, in either event
rounded up to the nearest cent. If an employee is not a participant on the last
day of the payment period, such employee is not entitled to exercise his or her
option, and the amount of his or her accumulated payroll deductions will be
refunded. Options granted under the 1999 Employee Stock Purchase Plan may not
be transferred or assigned. An employee's rights under the 1999 Employee Stock
Purchase Plan terminate upon his or her voluntary withdrawal from the plan at
any time or upon termination of employment. No options have been granted to
date under the 1999 Employee Stock Purchase Plan.
F-23
Inside back cover:
[Photograph of customer service representative talking on the phone to a
customer, with the MotherNature.com Web site home page displayed on her
computer.]
[Photographs of our order fulfillment center.]
The following text appears on the inside back cover:
"a high level of customer service is important to retaining and expanding our
customer base. To support our commitment to superior service, MotherNature.com
has invested in a new 25,000 square foot order fulfillment center. Located in
Springfield, Massachusetts, the new center lets us control the entire customer
experience, from initial contact to shipment. Our employees pick and pack
orders from our extensive on-hand inventory, enabling us to provide same-day
shipping on many popular products."
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Prospective investors may rely only on the information contained in this
prospectus. Neither MotherNature.com, Inc. nor any underwriter has authorized
anyone to provide prospective investors with different or additional
information. This prospectus is not an offer to sell nor is it seeking an offer
to buy these securities in any jurisdiction where the offer or sale is not
permitted. The information contained in this prospectus is correct only as of
the date of this prospectus, regardless of the time of the delivery of this
prospectus or any sale of these securities.
No action is being taken in any jurisdiction outside the United States to
permit a public offering of the common stock or possession or distribution of
this prospectus in any such jurisdiction. Persons who come into possession of
this prospectus in jurisdictions outside the United States are required to
inform themselves about and to observe the restrictions of that jurisdiction
related to this offering and the distribution of this prospectus.
Until January 4, 2000 (25 days after the date of this prospectus), all dealers
that buy, sell or trade our common stock, whether or not participating in this
offering, may be required to deliver a prospectus. This requirement is in
addition to the dealer's obligation to deliver a prospectus when acting as
underwriters and with respect to their unsold allotments or subscriptions.
---------------------
TABLE OF CONTENTS
---------------------
Page
----
Prospectus Summary....................................................... 1
Risk Factors............................................................. 5
Use of Proceeds.......................................................... 18
Capitalization........................................................... 19
Dilution................................................................. 20
Selected Financial Data.................................................. 21
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 22
Business................................................................. 29
Management............................................................... 46
Principal Stockholders................................................... 54
Certain Transactions..................................................... 57
Description of Securities................................................ 60
Shares Eligible for Future Sale.......................................... 64
Underwriting............................................................. 66
Legal Matters............................................................ 69
Experts.................................................................. 69
Where You Can Find More Information...................................... 69
Index to Financial Statements............................................ F-1
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MotherNature.com, Inc.
[MOTHERNATURE.COM LOGO APPEARS HERE]
4,100,000 Shares
Common Stock
---------------
PROSPECTUS
---------------
Bear, Stearns & Co. Inc.
Hambrecht & Quist
Wit Capital Corporation
December 10, 1999
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